Credit crunch chops price of Home Depot supply unit

Home Depot agreed to sell its contractor-supply unit for $8.5 billion, about $1.8 billion less than the original price two months ago, after the U.S. credit squeeze curbed demand for leveraged-buyout debt, people familiar with the deal said Sunday.

The second-biggest U.S. retailer will finance $1 billion of the sale to three private-equity firms, said the people, who declined to be identified because a final accord hadn't been signed. The company was forced to renegotiate with Bain Capital, Carlyle Group and Clayton, Dubilier & Rice after lenders pressed for more favorable terms.

The deal may mark a turning point for the private-equity industry, as the banks and the buyers have endured a long and ugly renegotiation likely to have wide repercussions.

The world's largest home-improvement chain attempted to sell HD Supply amid the worst U.S. housing market in 16 years. The unit provides tools and lumber to builders and accounts for about 13 percent of Home Depot's sales.

The banks — Merrill Lynch & Co., JPMorgan Chase and Lehman Bros. Holdings — had threatened to walk away from the transaction, citing the slump in HD Supply's business, the people said.

Home Depot spokeswoman Paula Drake declined to comment, as did representatives of the firms involved.

Home Depot planned to use the sale proceeds to help fund a $22.5 billion stock buyback.

The Atlanta retailer will also take about a 10 percent equity stake in the division, another source said. An announcement is expected today.

The reduced price comes as the credit-market crunch has forced banks to reel in loose lending practices that came to define the private-equity frenzy of the last two years.

Private-equity firms buy companies by borrowing. They typically keep companies for two to four years before selling them, hoping to make two to three times what they spent on the business.

From the beginning of the year until mid-August, private-equity firms announced $712.9 billion worth of deals, more than double the year-ago period, as frothy debt markets and a steady economy allowed cheap borrowing.

But the meltdown in the subprime-mortgage market spurred a credit crunch across Wall Street, forcing banks to stop lending large sums to private-equity buyers.

As debt investors have stopped buying for the time being, the banks are forced to take the debt on themselves, raising the risk of losing money on the deal.

Analysts say Home Depot Supply may go down as a transaction that marks what could be the end of the private-equity megadeal frenzy.