Home Depot Talks
On Unit Get Hostile
To Set Deal; Banks
Challenge Terms
August 24, 2007; Page A10
Home Depot Inc. last night was close to accepting about $1.2 billion less for its wholesale distribution business in the sale to three private-equity firms, people familiar with the matter said.
But there were still substantial doubts about whether the deal would close before a deadline yesterday night, as three major banks continued to balk over the financing.
The situation was becoming increasingly ugly, people familiar with the matter said, with some of the most senior figures on Wall Street trying to manage their exposure to a deal beset by twin crises in both the housing and credit markets. The banks -- J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. -- were last night preparing for the possibility of lawsuits from the private-equity firms over the matter, those people said.
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MORE ON DEALSPeople involved in the deal said there was a flurry of negotiations to salvage the transaction, which was originally priced at $10.3 billion by a trio of Bain Capital, Carlyle Group and Clayton, Dubilier & Rice. It was still possible a deal could be struck that satisfies all sides, those people said.
The outcome will be a test of wills between Wall Street and private-equity firms. In recent years, the buyout shops have used their clout to extract sweeter financing terms from the banks. These terms also made it harder for the banks to back out of their financing commitments. Until recently, the banks were happy to oblige, given the lucrative fees that flowed from the buyout groups.
Pinched by the current credit crisis, the banks are toughening their stance against the private-equity firms. With a backlog of some $300 billion of U.S. private-equity deals still to be funded, the banks are now facing significant write-downs on their balance sheets and are weighing how to extract themselves from as many buyout transactions as possible.
It is no accident that the HD Supply deal is the first test of this dynamic. The housing market underpinning its core business -- distributing building materials for new construction -- is in distress. That already has made the $10.3 billion price tag seem high, and the terms of the original debt especially unattractive for the banks.
In this case, the buyers also had leverage on Home Depot, because the Atlanta-based retail giant was counting on the cash to finance its own stock buyback plan.
Home Depot declined to comment. Last week, it said it may have to cut the buyback if the sale doesn't go through.
One bank caught in the middle of the ordeal has been Lehman Brothers, which began as both adviser to Home Depot and a financing source to the buyout group. Such dual roles have become common in buyouts, but the current situation shows how difficult the position can become. Goldman Sachs Group Inc. has since replaced Lehman as Home Depot's financial adviser.
Investors are also concerned about what a scotched deal means for Home Depot. Under new Chief Executive Frank Blake the home-improvement retailer is attempting to turn around its 2,000 stores. Even before slumping housing sales and rising interest rates dampened sales in the home-improvement industry in general, Home Depot was losing market share to its smaller competitor Lowe's Cos.
Shortly after Mr. Blake took the reins at Home Depot, he said his focus would be to refurbish and re-energize the stores. It became clear that selling HD Supply was essential to Mr. Blake achieving the needed turnaround. HD Supply, an amalgam of 40 wholesale construction-supply companies, had drained the company's focus and funds in the past few years.
--Ann Zimmerman contributed to this article.
Write to Dennis K. Berman at dennis.berman@wsj.com and Henny Sender at henny.sender@wsj.com
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