Home Depot Sells Unit, With Price Cut on Home Services

Dec

Home Depot Sells Unit, With Price Cut

posted by admin in Home Depot

Home Depot agreed yesterday to sell its commercial supply business to an alliance of private equity firms for $8.5 billion, nearly $2 billion less than the original agreement.

The sale was one of the first big buyouts to be renegotiated because of the recent tightening of credit and problems in the housing market.

The company said it expected to earn about $7.9 billion from the transaction, which could close tomorrow.

The refashioned deal cut the price, as expected, by roughly 18 percent, or $1.8 billion. Because the deal relies heavily on debt, investors and bankers have been watching closely for signs of how new limits on credit could affect other large buyouts, collectively worth nearly $400 billion, that are pending.

Still, this deal is different in that the fortunes of Home Depot Supply, as the division is called, are tied closely to the housing market, which has also been weakening. After a series of negotiations to save the deal, Home Depot and the participating banks and buyout firms were all forced to put up more money to shore up the financing.

As part of the amended terms, Home Depot will buy a 12.5 percent equity stake in H.D. Supply for $325 million and will guarantee a $1 billion senior secured loan from the banks.

Despite the softness in the financing and residential construction markets, the terms of the H.D. Supply sale deliver shareholder value today and in the future, as we will share in H.D. Supplys upside potential,Frank Blake, the chief executive of Home Depot, said in a statement. We are now focused on our retail business.

The Home Depot deal involves some of Wall Streets biggest players. The alliance buying the unit included the Carlyle Group, Bain Capital and Clayton Dubilier %26 Rice, and the banks financing the deal included Lehman Brothers, JPMorgan Chase and Merrill Lynch. Goldman Sachs advised the company on the amended agreement.

First announced in June, the sale of H.D. Supply was meant to refocus Home Depot on its retailing operations. Despite its creation in 2000 by the chief executive, Robert L. Nardelli, as a way to tap a new market, the division never reached the profitability executives had sought, and it underdelivered on cost savings from the retailerï¿½s two businesses.

But by August, the buyout firms dragged Home Depot back to the negotiating table, threatening to walk away by declaring a so-called material adverse change in the unit because of the housing markets.

Though it remained unclear whether that alone could have permitted the firms to walk away without paying a $309 million breakup fee, Home Depot agreed to lower H.D. Supplys price to about $9 billion.

The banks then rushed in, demanding their own concessions and initiating weeks of marathon conference calls and heated threats. Banks have sought to avoid taking on billions of dollars in loans to finance buyouts. Since the credit markets froze a month ago, firms like JPMorgan, Merrill and Lehman have been unable to resell that debt to risk-averse investors.

Holding that debt on their books could pose a threat to their quarterly earnings, especially for firms like Merrill and Lehman, whose balance sheets are smaller than the big banks.