Home Depot agreed today to sell its commercial supply business to a consortium of private equity firms for $8.5 billion, nearly $2 billion less than the original agreement. It is one of the first big buyouts to be renegotiated as a result of the recent tightening of credit and problems in the housing market.

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News Analysis: Redone Home Depot Deal Not Thought Contagious (August 28, 2007)

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

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 purchase a 12.5 percent equity interest in the whole business for $325 million and will guarantee a $1 billion senior secured loan of Home Depot Supply.

揇espite the softness in the financing and residential construction markets, the terms of the HD Supply sale deliver shareholder value today and in the future as we will share in HD Supply抯 upside potential,?Frank Blake, the chief executive of Home Depot, said in a statement. 揥e are now focused on our retail business.?/p>

The Home Depot deal involves some of Wall Street抯 biggest players. The buying consortium includes the Carlyle Group, Bain Capital and Clayton Dubilier & Rice, and the banks financing the deal include Lehman Brothers, JPMorgan Chase and Merrill Lynch. Goldman, Sachs advised the company on the amended agreement.

In announcing the possible repricing of the sale earlier this month, Home Depot said it would trim the price it was offering in a stock buyback, initially worth about $22.5 billion.

Even so, the buyout firms threatened to walk away from the deal, declaring that the housing market抯 decline had created what is known as a material adverse change. Such clauses are common in deals, allowing buyers to walk away. In this case, however, it was not clear whether the declines in the housing and credit markets qualified as deal breakers.

Still, Home Depot buckled and agreed to lower the price to about $9 billion. Then the three investment banks demanded a better deal as well, setting off a marathon of conference calls as the banks threatened to walk away from their financing commitments.

Over the last two years, banks have climbed over each other to lend billions of dollars ?and reap lucrative fees along the way ?to private equity firms as they have swept up an unprecedented number of companies. To recoup their capital, banks resold the debt as high-yield bonds and loans in the credit markets.

But when the credit markets froze because of the implosion of the subprime mortgage market, investors started refusing to buy nearly all forms of debt not backed by the federal government.

Because of concern about heavy losses in the market for subprime mortgage securities, the stock market has become volatile recently, falling sharply after peaking in mid-July. Credit markets have also been in turmoil. Lenders have cut back on all kinds of loans, not just mortgages but also loans to help finance corporate takeovers by private equity firms.

The financial markets calmed a bit last week after the Federal Reserve stepped in with measures to stimulate lending, but uncertainty over the extent of problems in the credit markets have left many investors unnerved. If the Home Depot deal had fallen apart altogether, that might have been interpreted as a particularly bad sign for the market.

The stock prices of companies involved in other pending buyouts are near their deal prices, suggesting that investors expect them to be completed as originally agreed upon. However, when one participant in the Home Depot battle was asked what would happen to the next series of deals, he said: 揝tudy what just happened here. You抣l see this movie again soon.?