Home Depot's board voted to sell its construction-supply unit for $8.5 billion yesterday to private equity firms Bain Capital, Carlyle Group and Clayton, Dubilier & Rice -- 18% less the $10.3 billion they agreed upon in June, a reflection of the credit crunch that has surfaced in recent weeks, making large debt-financed deals complicated and uncertain. Home Depot will hold on to 12.5% of the unit's equity, and was forced to guarantee $1 billion of the debt for the leveraged buyout. The deal's lenders, including Merrill Lynch, Lehman Brothers and JPMorgan, demanded better terms so they would be left with less money in loans in case they could not repackage and sell those loans in the presently spooked debt markets. There are still $400 billion in buyout deals in the works, and with demands to purchase this debt drying up, banks will be forced to make similar plays, or hold on to debt and increase their risk exposure. Home Depot was planning to use the all-cash deal to finance a $22.5 billion stock repurchase; the restructured the deal will likely postpone the buyback. The deal remains uncertain, as banks are still hesitating on terms. Home Depot closed up 1.6% midday to $35.25, but is down 12% on the year.
Sources: Wall Street Journal, Bloomberg, MarketWatch
Commentary: Home Depot: This Buyback Was Destined To Fail • Home Depot: Poor Earnings Puts Supply Division and Buyback Deal At Risk • Home Depot: Despite Good News, Uncertainty Remains
Stocks/ETFs to watch: HD, MER, LEH, JPM. Competitors: LOW, WOS. ETFs: PSP.
Earnings call transcript: The Home Depot Q2 2007
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