Home Depot (NYSE:HD) recently announced $2 Billion dollar indebtedness. They told the shareholders and market in general that they could raise more and still be comfortable financially. The finds are predominantly earmarked for share redemption. This creates the very temporary illusion or delusion of increasing earnings per share because you buy and cancel stock. You have not done anything clever its just financial engineering.
One tranche for ten years and the second billion dollars for thirty years. If you believe interest rates are low lock in as long as you can get. If you believe your business plan is not respected borrow tons of money and buy out stupid shareholders who are looking for a way out.
$2 Billion is a lot of debt. What board of directors would approve of the leverage? Do they have a propensity to borrow? Are they debt junkies? Some directors cannot stand borrowing a nickel but not these guys.
Lets take a look at the profiles and see what characteristics can be spotted.
The average age of the directors is approximately 58. Average tenure is 6.5 years. Only nine directors so independents are a little small. Two women at this point.
Gregory Brenneman 50 currently a private capital guy. Was the President of Continental Airlines. Turned around Quiznos and Burger King. Became President of PwC Consulting prior to its sale to IBM. Always a series of very short assignments. Quick fixes in turnarounds and airlines borrow lots of money.
Armando Codina 65. Strong roots as a real estate developer. These guys may be very astute but they operate in a leverage driven environment.
Karen Katen 62 Career Pfizer Executive since 1974. Learning the ropes as a director of a publicly traded company. While she probably has done well in positions of increasing importance she is green when it comes to directing public companies and huge debt loads.
Mark Vadon 42. Founder and chief of everything at Blue Nile an online diamond and jewelry retailer. Prior to that was a consultant at Bain. While I’m sure Blue Nile is a bone fide success story its growth was driven by organic reasons. New technology taping into the age-old penchant for jewelry. So why do you want to borrow a lot of money? You have no experience base in leveraged grind em out and fight like hell companies.
Bonnie Guiton Hill 70 and lead director. Consultant. Was the SVP Communication and Public Affairs for LA Times, a Tribune asset.
F Duane Ackerman 69 Retired President and CEO of Bell South. All experiences are with a telco utility that had huge monopoly power and could borrow against future revenue streams. When a retail operating company borrows it’s very different. not sure he has the perspective to get that.
S Frank Brown 55 Audit committee financial expert as per SEC guidelines. Just finished his term as dean of Insead. 26 years at PricewaterhouseCooper. Bio says he is an author but does not say what he wrote. Very cruel. Authors hate that.
Albert Cary 60 Career Frito-Lay and Pepsi Executive. Started off with seven years at Proctor and Gamble. Packaged consumer goods and foods. Not exactly building materials. Do marketing guys ever understand numbers like the finance guys? No.
No one on this board understand a two by four. No one on this board understand the economic and housing cycle. So they all bought into a story to borrow two billion and maybe more because the power point looked very good.
Given a 6.5 year average tenure most of these guys will not be around when the first tranche for $1 Billion has to be repaid or rolled forward. Good luck with that.
George Gutowski writes from a caveat emptor perspective.