Redone Home Depot Deal Not Thought Contagious on Home Services

Dec

Redone Home Depot Deal Not Thought Contagious

posted by admin in Home Depot

As the deal for Home Depots wholesale supply unit was renegotiated over the weekend, a question lingered about whether the push to lower the price was a harbinger for other buyouts.

Home Depot agreed Sunday to make several concessions in the sale of the unit, HD Supply, including lowering the price by $1.8 billion, to $8.5 billion, and keeping a sizable stake in the unit. The deal is expected to be completed as early as today when the paperwork is finished, people involved in the talks said last night.

With the credit markets all but frozen, some investors have been fretting that anxious banks and private equity firms may try to repeat the feat with other buyouts, like those for First Data, the credit card processor, or TXU, the Texas energy giant, which are scheduled to be completed in the next two months.

But fears about a rash of renegotiated or collapsed deals increasingly seem misplaced, analysts said yesterday.

As investors have sifted through the $400 billion in deals that are scheduled to be completed, it appears that Home Depot may have been a special case it had numerous idiosyncrasies that aligned to make the renegotiations possible that and may make it less likely that other deals will follow in its path.

I donâ€™t think itâ€™s a paradigm change, Donna Hitscherich, a professor of finance and economics at the Columbia Business School.

For one, the sale to a consortium of buyout firms that included Bain Capital, the Carlyle Group and Clayton, Dubilier %26 Rice involved an asset, rather than an entire company. As a result, the parent company was able to retain an equity stake and provide financing ï¿½ Home Depot will hold onto 12.5 percent and also agreed to provide $1 billion in debt financing ï¿½ two crucial factors in averting the dealï¿½s collapse.

Also, in contrast to companies like First Data or Alltel, the rural cellphone service provider, Home Depot was not being sold ï¿½ and in this case, was desperate for cash. Home Depot was counting on the sale to help finance a $250 million share buyback to lift its flagging stock.

In announcing this month that it might reprice the deal, Home Depot said it was cutting the price it was offering in its buyback, and some feared that the repurchase might be withdrawn entirely if the deal fell apart.

Furthermore, it took more than the implosion of the debt markets to drag Home Depot back to the table. There was the simultaneous blow of the collapsing housing market, which has sapped profits from HD Supply specifically, and from Home Depot more generally.

In this case, it was the private equity firms, not the banks, that came back to the table first, despite saying that HD Supplys worsening financial condition was reason enough to walk away.

It remains unclear whether the buyers actually had legal ground to walk away without paying a $309 million breakup fee. The material adverse change clause, which requires something significant to change, specifically ruled out changes affecting any or all of the wholesale distribution industries for construction and general financial or capital market conditions, including interest rates or currency exchange rates.

But Home Depot could not afford to call the bluff of the private equity firms and agreed to lower the price to $9 billion.

Then the banks rushed in, demanding their own concessions. Though Home Depotï¿½s legal counsel, Martin Lipton of Wachtell, Lipton, Rosen %26 Katz, counseled that the first renegotiated deal did not alter the agreements with the banks, the heads of JPMorgan, Merrill Lynch and Lehman Brothers indicated otherwise.

Though the banks themselves could not declare that a material adverse change had occurred, they seemed to have argued that Home Depot and the private equity firms essentially admitted as much. That left an opening to press forward with their own demands.

Still, the role of the material adverse change clause seems limited in most other buyouts, analysts said. It could, however, have been a factor in the deal for the Chrysler Group and may be a factor for the impending Sallie Mae buyout.

Even then, crucial differences remain. Though the Chrysler deal was also a sale of a unit in a troubled industry, the negotiations among DaimlerChrysler, Cerberus Capital Management and the JPMorgan-led consortium of banks were far friendlier, as all parties admitted that the sale of the American carmaker could not go through without significant help.

Hence, when the banks were unable to resell more than $12 billion in buyout-related debt in the markets, Cerberus and Daimler agreed to hold a collective $2 billion of that on their books.

At Sallie Mae, the buyers the buyout firms J. C. Flowers and Friedman Fleischer %26 Lowe, and JPMorgan and Bank of America have all but declared a material adverse change in the student lender, citing several bills circulating in Congress; the company, however, has fiercely contested those claims.

Stock in Sallie Maes parent, the SLM Corporation, has fallen as much as 11 percent since the squabble was made public.

But few think the buyers want to break off the deal. And some have argued that Sallie Maes clause about material adverse change is close to airtight, setting a high bar for the buyers to make their point.

Like virtually any buyer, private equity firms would prefer to pay less. But absent the combination of very specific conditions, it is not clear they can doctor other deals to match the Home Depot script.