Home Depot Said to Cut Price to Try to Save Sale of Unit on Home Services

Dec

Home Depot Said to Cut Price to Try to Save Sale of Unit

posted by admin in Home Depot

Home Depot was scrambling last night to save the sale of its wholesale unit to a consortium of private equity firms, lowering its asking price by about $1.2 billion from the original $10.3 billion it agreed upon, people involved in the talks said.

Still, the deal announced in June remained uncertain as the banks that committed to finance the transaction JPMorgan Chase, Lehman Brothers and Merrill Lynch threatened to back out, setting up a showdown that could become a harbinger amid the current credit crisis.

The sale of Home Depot wholesale unit, which provides pipes, lumber and concrete for professional builders, is the first deal-related victim of the housing slowdown and the credit squeeze. The confluence of both problems has created an enormous headache for Wall Street, which had agreed to back dozens of huge buyouts at very attractive rates and will now very likely suffer big losses as a result.

In the case of Home Depot, the deal has created a battle that pits some of Wall Street biggest banks against some of its biggest clients the consortium of private equity players that includes Bain Capital, the Carlyle Group and Clayton, Dubilier Rice.

Despite Home Depot willingness to reduce the asking price to just slightly more than $9 billion, the banks that committed to finance the transaction are worried that the dip in the housing market %26#151; and its impact on Home Depot wholesale unit means they will be able to sell the debt to other investors only for a fraction of what they paid, losing hundreds of millions, if not billions, of dollars.

The conversations among the banks, private equity firms and Home Depot have become heated since Wednesday, according to people involved in them, as executives from varying sides have made an assortment of not-so-thinly-veiled threats. One person involved in the talks described them as the most expensive game of chicken youâ€™ve ever played.

Some of Wall Street most senior bankers canceled their vacation plans to return to New York. And the chief executives of JPMorgan Chase, Lehman Brothers and Merrill Lynch are all being regularly briefed on the status of the negotiations.

If the banks were to walk away, they might seek to claim that Home Depot wholesale unit suffered what is known on Wall Street as a material adverse change.

It is unclear, however, whether they would have grounds to make such a claim; the agreement of the banks to finance the deal specifically says that neither changes affecting any or all of the wholesale distribution industries for construction nor general financial or capital market conditions, including interest rates or currency exchange rates would constitute a material adverse change.

For the banks involved, the negotiations could put their reputations at risk, some analysts have suggested. The talks are particularly embarrassing for one of Lehman Brothers most senior bankers, Andrew Taussig. Mr. Taussig, whom Lehman wooed from Credit Suisse in 2005, acted as an adviser to Home Depot while Lehman also committed to finance the buyers.

Playing both sides of the field advising the seller and lending to the buyers has become almost routine on Wall Street in recent years, a practice known as staple financing. But as the Home Depot example demonstrates, it can also create real conflicts. As more deals run into trouble in the months ahead, some bankers have speculated that clients may reduce, if not eliminate, practices like staple financing.

If the Home Depot deal collapses, the banks and private equity firms are likely to be hit with a number of lawsuits.

Home Depot, unlike some other sellers in private equity deals, was willing to reduce the price of its wholesale unit because it is under pressure to shed assets. The company is already committed to a large stock buyback plan and was hoping to use the proceeds of the sale to finance it.