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CNBC Exclusive: Home Depot Holder Pushes Changes at Retailer

cnbc.com
Monday, 18 Dec 2006 | 5:13 PM ET

An investment firm is taking aim at Home Depot, saying the troubled retailer needs a major overhaul of its strategy.

In an exclusive interview with CNBC, Ralph Whitworth, founder of Relational Investors, which owns 0.6% of Home Depot shares, said he has proposed that a special panel of independent directors review the retailer's direction, management performance and strategic options--including a buyout.

Shareholders vs. Home Depot
Activist firm Relational Investors is going after Home Depot in an effort to force the board to evaluate the company's direction. CNBC's Maria Bartiromo interviews Ralph Whitworth, Relational Investors Founder.

“This company is nothing like it was five years ago," Whitworth told CNBC's "Closing Bell." "What we believe is that management should be focused like laser beams on the core business, improving the customer experience, improving their efficiencies in that business and not engaging in this strategic adventure, going off into the supply business."

Home Depot, which has been plagued with falling profit and a regulatory probe about its options practices, told Reuters it will oppose Relational Investors' proposal and any proxy solicitations, adding that its board unanimously supports the management team. The company said it has advised Relational that it will arrange a meeting early next year.

Relational Investors, which previously led a proxy battle at Sovereign Bancorp and eventually took one seat on that company's board, also said it may seek one or more board seats at Home Depot's 2007 annual meeting.

Peter Jankovskis, director of research at Oakbrook Investments in Lisle, Illinois, said the move by Relational Investors could be an attempt to stimulate a price boost rather than evidence of substantial shareholder discontent.

"Normally I don't take any of these things too seriously until an investor comes in and buys more than 5% of shares outstanding," Jankovskis said. Oakbrook owns more than
475,000 Home Depot shares.

Jankovskis said he supports Home Depot's strategy, which includes an aggressive push to expand contractor sales and move into new global markets. Last week, Home Depot said it would buy Chinese retailer The Home Way.

More Investor Scrutiny

The move by Relational Investors points to increased investor scrutiny of the home improvement industry leader in wake of concerns about a slumping stock and negative publicity over executive pay and other governance issues.

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Home Depot's stock, boosted in recent weeks by takeover speculation, is down less than 1% this year. The retailer has a current market capitalization of about $82 billion.

"We see today's event as supporting our view that Home Depot's shares are undervalued," Deutsche Bank analyst Mike Baker said in a research note.

Whitworth promises to be "persistent and tenacious."

"We will stay at this until one thing happens and (that means) these assets are properly valued in the public marketplace," Whitworth told CNBC's "Closing Bell," which he says equates to a 50% increase in the stock price. "That can happen with a very simple fix: refocus on the core business, get out of this supply business, take the cash out of that and give it to shareholders in dividends or share repurchases."

He said that since Home Depot Chairman and CEO Robert Nardelli took office in 2000, the stock has risen "less than a T-Bill, or about 1%" while Nardelli "took $330 million out of the company" over that period. Whitworth said Lowe's share price has risen about 21% over the same period, while its chief was paid $60 million. "That is a smoking gun," he told CNBC.

Another Proposal Submitted

Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees, on Monday said his group submitted a Home Depot shareholder proposal for 2007 that would amend the company's bylaws to split the roles of chairman and chief executive.

Specifically, the proposal calls for the chairman to be "independent" from the corporation, according to a copy sent to Reuters.

A similar proposal failed to pass at this year's Home Depot annual meeting but garnered 41% support.

"The board is not committed to real substantive change so activist shareholders will be joining together to mount various challenges," said Ferlauto, a critic of the pay package of Home Depot's Nardelli.

The investor attention comes as the cooling U.S. housing market hurts results. Home Depot's earnings fell more than 3% in the third quarter ended Oct. 29, while sales at stores open at least a year, a key retail measure, dropped 5.1%.

Earlier this month, Home Depot said that errors tied to backdating of some stock option grants resulted in unrecorded expenses of about $200 million. A review conducted by outside counsel found no wrongdoing on the part of current management or the board, it added.

The Securities and Exchange Commission is reviewing Home Depot's stock-option practices, and the U.S. Attorney for the Southern District of New York has requested information.

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