Aug. 24 (Bloomberg) -- Home Depot Inc., the home improvement retailer that agreed in June to sell its contractor-supply business, may cut the original $10.3 billion price by about $1 billion to salvage the deal, two people with knowledge of the matter said.

Negotiations with private-equity firms Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice and their banks continued as a deadline approached last night, said the people, who asked not to be identified. It was possible that the sale would fall through, they said.

Atlanta-based Home Depot, the second-biggest U.S. retailer, said on Aug. 9 that it may need to cut the price for its HD Supply unit, and later extended the date to complete the deal to yesterday. The subprime mortgage crisis has curbed demand for leveraged-buyout debt, forcing private-equity firms and their lenders to provide terms more palatable to investors.

``It's unclear to me if the banks are saying they're unwilling to lend, or unwilling to lend at a cost acceptable to the private-equity guys,'' said Walter Todd, a principal at Greenwood Capital Associates LLC in Greenwood, South Carolina. ``There's a lot of turmoil in the credit markets right now.''

At the same time, the worst U.S. housing market in 16 years has slowed home construction, an industry that HD Supply counts on for revenue. The unit provides tools and lumber to builders and accounts for about 13 percent of Home Depot's sales. The company is the world's biggest home-improvement retailer.

Home Depot Shares

Home Depot rose 66 cents, or 1.9 percent, to $34.68 at 4 p.m. in composite trading on the New York Stock Exchange composite trading. The shares have slipped 9.4 percent since the deal was announced in June.

The deadline, sat at midnight New York time, passed without an announcement. Home Depot spokeswoman Paula Drake declined to say whether it had been extended or otherwise comment.

As the closing date neared, the banks financing the buyout were arguing that they should also benefit from any price cut by reducing the amount they committed to the deal, according to three people familiar with the talks who asked not to be identified.

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

Debt Guarantee?

Another possibility was that Home Depot might take on or guarantee part of the debt necessary to fund the purchase, the Financial Times reported today, citing people familiar with the talks. A similar arrangement helped resolve Cerberus Capital Management LP's buyout of automaker Chrysler LLC.

Representatives of the private-equity firms and banks declined to comment publicly or didn't return telephone calls.

The dispute underscores the tensions that have surfaced between private-equity firms and their lenders as investors' demand for leveraged-buyout debt has weakened.

Lehman, which also helped Home Depot choose bidders for the supply business, abandoned its advisory role when it became clear the bank couldn't represent the company fairly while fighting with the buyout firms, people familiar with the matter said.

Home Depot planned to use the sale proceeds to help fund a $22.5 billion stock buyback. If the sale falls through, the company may buy back $12 billion of its shares, Chief Financial Officer Carol Tome said Aug. 14.

The buyback is part of Home Depot Chief Executive Officer Frank Blake's plan to refocus the company on its retail stores. His predecessor, Robert Nardelli, was criticized by investors for expanding the supply unit at the expense of store performance.

HD Supply accounted for $12.1 billion of Atlanta-base Home Depot's $91 billion in sales last year.

To contact the reporter on this story: Justin Baer in New York at jbaer1@bloomberg.net; Mark Clothier in Atlanta at mclothier@bloomberg.net.

Last Updated: August 24, 2007 17:55 EDT