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Credit woes take bite of retail deal

Home Depot is said to agree to slash the price of a unit being sold to private equity firms after lenders balk.

August 27, 2007|Tom Petruno and Lorenza Munoz | Times Staff Writers

Retail giant Home Depot Inc. agreed Sunday to slash the price of its wholesale distribution business, which is being sold to a group of private equity firms. The revised deal is one of the most potent signs yet of the deepening credit crunch that has roiled the nation's financial system and markets this summer.

Faced with balking lenders unwilling to finance the type of rich buyout that was common in the first half of this year, Home Depot agreed to accept $8.5 billion for its HD Supply unit -- instead of the $10.3-billion price tag set in June, a person familiar with the transaction said.

The lower price was tentatively approved by Home Depot's board of directors Sunday. A company spokesman declined to comment.

The changed terms could have ramifications for other huge buyout deals that were announced this year but still await final financing. Concern about the fate of those deals has been one factor pulling stock prices down this summer.

Atlanta-based Home Depot was forced to renegotiate after the investment banks financing the deal, including JPMorgan Chase & Co., Merrill Lynch & Co. and Lehman Bros. Holdings Inc., threatened to walk away.

That triggered a battle between the banks and some of their most important clients -- the private equity firms that have been on a record buyout spree in the last two years, snapping up companies across a broad spectrum of industries.

Under the revised terms of the HD Supply transaction, each of the buyers in the private equity consortium -- Bain Capital Partners, Carlyle Group and Clayton, Dubilier & Rice -- would increase the amount of equity it would commit to the deal to $800 million, up from $650 million.

What's more, Home Depot has committed to finance $1 billion of the debt required, removing some of the load from the investment banks.

The corporate takeover wave that helped drive stock prices to record highs in the first half of 2007 has been threatened by a growing credit crunch that has its roots in the housing market's woes.

Soaring defaults on home mortgages have caused investors to flee mortgage-backed bonds. The sudden aversion to risk-taking then spread to corporate bonds, particularly so-called junk issues used to finance takeovers.

Investment banks had agreed to finance many of the deals on the assumption that they would quickly be able to sell the debt to other investors worldwide, which had been common practice in the last few years.

But once-eager investors have become unwilling to step up. That raises the likelihood that the investment banks will have to hold on to far more of the buyout debt than they had planned, boosting their own risk of loss.

Across the financial system, the credit crunch has become so serious this summer that on Aug. 17 the Federal Reserve took the unusual step of lowering the interest rate at which it lends to banks. The Fed has encouraged banks to borrow to keep credit flowing in the economy.

Central banks in Europe, Japan and elsewhere also have pumped huge sums into their banking systems in recent weeks, trying to calm jittery financial markets and keep credit available.

Corporate buyout transactions already announced will have to raise more than $300 billion in financing in the next few months in order to pay off shareholders.

Among the deals pending is a $19.5-billion buyout of Clear Channel Communications Inc. by private equity firms Bain Capital and Thomas H. Lee Partners, and a $26-billion bid by Blackstone Group for Beverly Hills-based Hilton Hotels Corp.

Home Depot's HD Supply unit is the company's wholesale distributor of building products. The company is seeking to shed the business to focus on its 2,200-store retail operation.

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