Home improvement retailer Home Depot Inc. on Tuesday said it would repurchase $22.5 billion in stock and sell its supply division to three private equity firms for $10.3 billion as it refocuses on its core retail business.

The sale of HD Supply to Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice unloads a business built up by the home improvement retailer's former chief executive.

Shares of Home Depot rose 3.5 percent to $39.60 in after-hours trading on news the company would repurchase $22.5 billion in stock, or nearly one-third its total market capitalization of $74.9 billion, "as soon as practical."

The stock buyback will be funded from proceeds from the sale of HD Supply, existing cash, and new debt, the company said.

Home Depot's buyback, if completed, would rank as the fifth-largest share repurchase by a U.S. company, according to research firm Dealogic. Microsoft Corp. (MSFT) established a $30 billion stock repurchase plan in 2004, Dealogic said.

Shares of Home Depot have fallen about 3.6 percent this year as growth in its core retail business slowed amid the weakening U.S. housing market and increased competition with smaller retail rival Lowe's Cos. Inc.

"We believe Home Depot's future financial policy will continue to be more shareholder-friendly given goals of using excess liquidity to repurchase shares and create value for shareholders," said Standard & Poor's credit analyst Stella Kapur.

"While we view Home Depot as having a strong business profile ... we also do not foresee a quick turnaround in the housing market," Kapur said.

S&P and rival debt-rating agency Moody's Investors Service said they could cut Home Depot's credit rating by several notches due to the stock repurchase plan.

HD Supply, which sells building materials, waste water and utility products to municipalities and contractors, was put up for sale earlier this year, with investment bank Lehman Brothers overseeing the auction. HD Supply had 2006 revenue of more than $12 billion.

The unit, which accounts for 13 percent of Home Depot's sales and 8 percent of its operating profit, was launched in 1997. Former Home Depot CEO Robert Nardelli boosted it in recent years by buying companies like water and sewer products supplier National Waterworks Holdings in 2005.

Last year, Home Depot expanded HD Supply with the $3.2 billion acquisition of Hughes Supply, the retailer's biggest purchase ever.

Some Wall Street observers saw the lower-margin supply business as a diversion from Home Depot's core retail operations. The retailer has nearly 2,200 stores; outside the United States, its locations include Canada, Mexico and China.

"On the one hand, Home Depot bought some great assets, but they didn't integrate them well," said CD&R's Dave Novak, adding that the residential construction side of the business is struggling. "But that's not the whole business. We plan on buying more businesses and focusing on operational improvements."

Novak said the consortium paid around 10 times the unit's cash flow from the prior year, with each firm putting in around $700 million each and borrowing the rest. CD&R was a finalist in bidding for Hughes Supply, he said.

INVESTING IN RETAIL

Frank Blake, named to Home Depot's top job early this year when Nardelli resigned amid an uproar over his compensation, said the retailer would consider strategic options for the supply business and invest more money in the retail stores to win back market share.

"When the market was really strong, Home Depot viewed the supply business as a way to diversify," said Keith Davis, an analyst with Farr Miller Washington, which owns the retailer's stock. "Now people think it makes sense to get back to basics and focus on the retail side."

The chain is increasing capital spending by 29 percent this year to maintain stores, recruit skilled staffers and upgrade its merchandise.

"Over the long term, I don't think (Home Depot's) growth is going to be anywhere near where it was historically," Davis said.

Although Home Depot, as a whole, has been seen by some analysts as a leverage buyout target, investment bankers scoffed at the idea due to the company's size and financial position.

"Home Depot needs so much capital expenditures to continue its growth that there's no way you can balance capital expenditures and the interest coverage and the interest payments ... and maintain a healthy, growing company," said Gilbert Harrison, chief executive of investment bank Financo Inc.

Several private equity firms showed interest in the supply unit but were scared off by the housing slowdown's impact on the business, sources involved with the auction told Reuters.

The winning bidders topped a rival offer from a team consisting of Thomas H. Lee Partners and CCMP Capital, according to sources involved in the deal.