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As everyone has been reading about for weeks now, the effects of sub-prime loan defaults have begun to trickle down throughout the US Economy. On Thursday, August 23rd Home Depot felt the effects first hand. The Company has been in negotiations to sell its wholesale distribution business to a trio of private equity firms for $10.3 billion. However, given the significant write-downs lenders are facing as a result of sub-prime defaults, the deal has been stalled. The stall has been a result of lenders becoming more risk averse, given the significant portfolio risk that has surfaced. This of course is magnified by the Home Depot wholesale division's direct link to the real estate markets, which are greatly stressed by foreclosures.

If the transaction closes at a price below expectations or not at all, it greatly reduces the company's ability to re-allocate capital, and maneuver in dynamic markets. The tightening of credit markets seems like it could impact the ability of large companies to divest business segments, in-turn reducing their ability to shift gears as quickly as smaller competitors.

Category(s): Valuation Thoughts
Posted by James Drybanski at 02:05 PM | Permalink | Comments (0) | TrackBacks (0)