Home Depot was where the banks finally fought back.

For years the juicy fees on offer from financing buy-outs saw them bend so far backwards in order to win private equity business that they had lost their balance. Huge financing commitments on super-favourable terms should never have been agreed even while (in Chuck Prince’s beautifully mistimed words) the music was still playing.

Now it has stopped, JPMorgan, Merrill Lynch and Lehman Brothers simply threatened not to provide the promised financing for the purchase of Home Depot’s supply business. Given the credit market dislocation they would have taken a big hit immediately. Rather than face a litigation crisis, all sides gave ground.

Home Depot appears to be the biggest loser, taking a massive 18 per cent price cut, agreeing to guarantee $1bn of debt and hold on to 12.5 per cent of the division’s equity. The banks agreed to go ahead but will put up less cash and make smaller losses than they would have.

The private equity groups come off best. They can play the good guys who wanted to close the deal but were forced to keep chipping away at the price by the nasty banks. True, they get worse debt terms and have to put up more equity, which will affect returns. But that also reduces the financial risk in the deal and, let’s face it, they are paying a full 18 per cent less than they originally agreed.

Other huge buy-outs in the system will face pressure from the banks. But they will be tougher to renegotiate. In this case, Home Depot was keen to sell the division for strategic reasons and the buyers could credibly argue the weak housing market had undermined the value of the business. It is less obvious public companies such as First Data will accept deep price cuts, given equity markets are only 5 per cent off their peaks and their businesses are not struggling.

Either way, the private equity groups still look best positioned. They can either use the generous financing terms originally offered by the banks or blame nervous lenders if they try to force a cut in the acquisition price.

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