Monday, August 27, 2007

Home Depot Hit As Credit Crunch Squeezes Deals

60 Days were enough to reduce the price by roughly 20 percent, force Home Depot to take an equity stake, guarantee some of the debt and eliminates lots of convenants that were given to the private equity buyer..... Look like the famous "private equity put" is still there but at a 30% lower pricelevel...... This deal looks similar to the Daimler/Ceberus/chrylser deal where Daimer was forced to step in to unload Chrylser.

60 Tage haben genügt um den Preis um 20% zu drücken, Home Deopt zu nötigen das sie entgegen dem ursprünglichen Plan eine Beteiligung behalten & noch zusätzlich für Schulden geradestehen müssen, die Kreditbestimmungen der Private Equity Käufer fast alle "lockeren Kreditbestimmungen" gestrichen worden sind usw......Sieht ganz so aus als wenn der sog. "Private Equity Put" der angeblich die Märkte nach unten absichert jetzt den Markt 30% tiefer absichert....... Dieser Deal ist fast ne 1:1 Kopie vom modifizierten Daimler/Ceberus/Chrylser Abschluß der Daimler ebenfalls zu ähnlichen Zugeständnissen genötigt hat um endlich Chrysler loszuwerden.

The global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot Inc. to sell its struggling wholesale supply unit for much less than what had been agreed to just two months ago.

Home Depot's board yesterday agreed to sell Home Depot Supply for $8.5 billion to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June when the buyout boom was at its peak.

In addition, Home Depot itself will hold about 12.5% of the unit's equity, people familiar with the matter said, and guarantee some of the debt issued by the banks to finance the acquisition. That's significant because if the banks can't sell the debt in bond markets, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

Just weeks ago, the buyout boom was a hugely profitable collaboration between private-equity firms and the Wall Street bankers who financed them. Now, amid the credit crunch, some private-equity firms and their bankers are at loggerheads as each camp tries to protect its bottom line, turning previously close allies against each other.

There are an estimated $400 billion in buyout deals working their way through the banking system. Wall Street committed to lend money for these deals as part of its plan to be in the "moving business," of packaging loans and equity stakes in the companies and selling them to investors, spreading out the risk of those transactions. With credit markets largely shut to big transactions, the banks have found themselves back in the old-fashioned "storage business," forced to keep the debt on their balance sheets and mark down its value.
Absorbing Write-Downs
In the process, the nation's banks might have to absorb tens of billions of dollars of write-downs. Such a toll would add to the pain of the far larger losses they are already toting up from the downturn in real estate and the meltdown in the market for mortgage securities.

That set the stage for the nasty squabble over HD Supply. The banks' argument: If the buyout firms could get a reduction in the price they were paying for the business -- Home Depot previously agreed to cut the price tag for the unit by about $1.3 billion to around $9 billion -- the banks should be able to change the terms of their financing for it and other deals. The buyout firms objected, saying a deal was a deal.

"This is what we pay them for," said one top buyout executive. "This is what underwriting is."

Caught in the middle are the companies that have agreed to be sold to buyout firms. Atlanta-based Home Depot, for instance, is suffering in part because of the downturn in the housing market and had planned to use the proceeds of the HD Supply sale to partially fund a $22.5 billion stock buyback plan. The $8.5 billion price tag will allow the retailer to go ahead with its buyback, a person familiar with the matter said, but it means that Home Depot will have sold the unit for little more than what it had spent to acquire the more than 40 wholesale contracting supply companies that make up the supply unit.

> More on the Home Depot buybacks / Mehr zu den Aktienrückkäufen von Home Depot

How Long Can Home Depot And Others Masked Poor Results With Buybacks?

Reviewing The Home Depot Buyback History.......

Among the features of the original HD Supply deal were many of the innovations private-equity firms have introduced in recent years in their pursuit of maximum flexibility. Those innovations denied the lenders many of the protections traditionally written into loan agreements. For example, there were almost no performance requirements set for HD Supply. If it chose not to use its cash to pay interest, the lenders would have no choice but to accept more debt instead of money.

> Here more on this issue that didn´t matter just 60 days ago....Convenant Lite Loans & Toggle Bonds

> Hier mehr zu diesem Thema das bis vor 60 Tagen noch überhaupt kein Problem gewesen ist....Convenant Lite Loans & Toggle Bonds

Unfortunately for the banks, investors have been on a buyers' strike recently and have refused to buy debt that gives them few rights.

Need for Flexibility
The banks argued that if the target company was so weak that the buyers needed all that flexibility, and refused to put in any terms and conditions, they shouldn't be buying the company in the first place. The lenders initially asked the private-equity firms to guarantee the debt involved in the deal -- which the private-equity firms say they refused to do.

A recent report from Citigroup's banking analyst estimated that J.P. Morgan was holding $40.8 billion of leveraged buyout financing, some of which may wind up on the bank's balance sheet if it can't syndicate the deals.

'Market Out' Provision
The banks had been on uncertain legal ground in pushing for changes in their commitments, according to lawyers who were involved in the deal and many who weren't. Rushing to establish market share in the buyout business, they largely dropped many standard financing conditions in deals struck for private-equity clients in the past few years. For instance, few recent deals have carried an arcane provision known as the "market out" that previously had allowed banks to pull out of commitment if the general financing market deteriorated. Even conditions for declaring an "out" for a specific target company's performance had been tightly drawn for the banks -- in contrast to the strengthened flexibility of private-equity firms when it comes to the ability to renegotiate or walk away.

> Goldman, JPMorgan Stuck With Debt They Can't Sell to Investors

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged,

The revised deal reduces the amount of debt the banks provided to about $6 billion. As part of the deal, the private-equity firms agreed to accept higher interest rates on portions of the debt, which offset some of the firms' other concessions. The buyout firms will write checks for almost $2.5 billion. The banks, in turn, will try to raise the $6 billion in debt from investors so they don't have to provide the entire sum themselves.

Most in the market still expect the bulk of the remaining private-equity deals to be completed. They point to HD Supply and the controversy around it as unusual for two reasons. It is one of the few deals in which the value of the equity as well as the debt involved in the deal was underwater, given the original $10.3 billion price tag, and is unlikely to be resold at anything near the current price anytime in the next few years.

Still, investors are warily trying to determine if other buyout deals might fall victim to similar problems. They have been scrutinizing real-estate-intensive deals, such as the pending buyout of Hilton Hotels Corp. and Harrah's Entertainment Inc., as well as radio broadcaster Clear Channel Communications Inc., whose sector has been hurt in recent weeks.

And they are already toting up losses that the banks will have to put on their books. In the $27 billion deal for First Data, for instance, some investors are figuring that the debt issued in connection with the deal is already worth 10% to 13% less than envisioned. That could mean seven banks sharing paper losses of more than $2 billion. The last-minute accord on the Home Depot's unit, with a reduction in the amount of debt, offers a potential road map for other deals that would avoid drastic write-downs.

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Blogger jmf said...

Kevin Depew from Minyanville
nails it!

Any Love is Good Love for Home Depot

Home Depot (HD) agreed to sell its construction-supply unit for $8.5 billion, cutting the price by $1.8 billion, or 18%, according to Bloomberg.

The original buyers, Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice, negotiated a reduced price from the original $10.3 billion price tag Home Depot sought just two months ago, according to Bloomberg.

So here's a question: How did Home Depot's construction-supply unit lose nearly $2 billion in value in less than two months?

The answer is, it didn't.
What HD's construction-supply unit lost was buyers with access to formerly cheap credit.

Wait a minute, wouldn't that mean the previously agreed-to price was more a function of psychology than "value"?

Yes, it would.

Ok then, so what is Home Depot going to use the sales proceeds for? To pay down debt? Re-invest in their business? Expand?

Nah, they're going to buy stock with it. Seriously.

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

12:07 AM  
Anonymous Anonymous said...

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12:21 PM  

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