The GMS Takeover Battle: Why Home Depot Outshines QXO in the Building Materials Play

The rivalry between QXO and Home Depot for control of GMS Inc. has reached a critical juncture, with regulatory scrutiny and valuation risks poised to reshape the building materials sector. While QXO's $5 billion hostile bid for GMS has drawn attention, Home Depot's strategic advantages, financial flexibility, and higher bid potential make it the superior play, despite the immediate premium offered by QXO. Investors should capitalize on this dynamic by buying Home Depot (HD) or shorting GMS (GMS) ahead of QXO's June 24 deadline for a binding offer.

Strategic Positioning: Home Depot's Long Game vs. QXO's Fragile Financials

Home Depot's counteroffer—rumored to exceed QXO's $95.20-per-share bid—targets GMS's 320 distribution centers and 100 tool rental locations, which are critical to expanding its contractor services business. This move aligns with Home Depot's broader strategy to capture a growing professional contractor market, where GMS's infrastructure offers a $2–3 billion strategic asset. By contrast, QXO's bid is a continuation of its aggressive consolidation in roofing and wallboard markets, following its $11 billion 2024 acquisition of Beacon Roofing Supply.

However, QXO's financial strain undermines its credibility. Its Q1 2025 adjusted EBITDA turned negative due to Beacon integration costs, and absorbing GMS's $1.4 billion debt would push its leverage to 5.2x EBITDA—a red flag for creditors. . Home Depot's stronger balance sheet allows it to navigate regulatory hurdles and integrate GMS without compromising its credit rating, making its bid more credible.

Valuation Risks: GMS's Weaknesses Undermine QXO's Premium

QXO's 27% premium over GMS's 60-day average stock price appears generous, but it ignores GMS's deteriorating fundamentals. The company's adjusted EBITDA fell 15.8% in Q1 2025 to $145.9 million, with margins contracting to 10.1%. Even with cost-cutting savings of $55 million annually, GMS's reliance on declining steel framing sales and weak Canadian housing demand paints a fragile picture.

Meanwhile, Home Depot's potential bid—potentially pushing GMS's shares to $105–$110—reflects the strategic value of GMS's distribution network. . This suggests QXO's offer is already priced in, while Home Depot's bid could unlock 20–30% further upside. For investors, betting on Home Depot's eventual victory offers better risk-adjusted returns than chasing QXO's immediate premium.

Regulatory Hurdles: FTC's August Deadline Could Sink QXO

The Federal Trade Commission's (FTC) review, due by August 2025, poses the greatest risk. The FTC has historically approved only 62% of mergers exceeding $5 billion in the fragmented building materials sector, and QXO's prior acquisition of Beacon has already raised antitrust concerns. Combining QXO's roofing dominance with GMS's wallboard operations could breach market-share thresholds, triggering a 20–30% drop in GMS's shares if blocked.

Home Depot, while not immune to scrutiny, benefits from its diversified business model and ability to divest assets if required. Its 19% U.S. retail market share poses less of a direct threat in roofing/wallboard markets, where GMS's operations are secondary to its core business. . The FTC's focus on market concentration suggests Home Depot's bid is more palatable, particularly if it can structure terms to mitigate competition concerns.

Investment Strategy: Buy HD, Short GMS Before June 24

The June 24 deadline for QXO to secure GMS's board acceptance creates a pivotal moment. If GMS's board rejects QXO's offer, the company will likely proceed with a hostile bid, but Home Depot's superior financial position and strategic rationale make its counteroffer harder to dismiss.

• Buy Home Depot: Investors should accumulate HD shares ahead of the FTC's decision. Historically, buying HD on its earnings announcement dates and holding for 20 trading days since 2020 has delivered an average annual return of 6.4%, with a total return of 16.48% through June 2025. While the strategy faced a maximum drawdown of -24.03%, it has capitalized on post-earnings rebounds, suggesting this approach could complement positioning ahead of the FTC ruling.
• Short GMS: Betting against GMS offers asymmetric upside. If the FTC rejects the deal or Home Depot outbids QXO, GMS's shares could drop to $65–$70, near their 52-week low. Even if QXO's bid proceeds, its financial fragility and FTC risks make the stock a poor long-term hold.

Conclusion

The GMS takeover battle is not just a battle of bids—it's a test of strategic vision and financial strength. Home Depot's superior logistics, balance sheet, and bid potential position it to win this war, while QXO's overleveraged structure and regulatory liabilities make its offer a risky gamble. With the FTC's decision looming, investors should prioritize Home Depot's upside and GMS's downside, using the June 24 deadline as a catalyst to position portfolios for this high-stakes outcome.

The path forward is clear: buy HD, short GMS—before the dust settles in August.