Aug. 27 (Bloomberg) -- Home Depot Inc., the world's biggest home-improvement retailer, cut the price of its construction- supply unit by 18 percent to $8.5 billion and agreed to guarantee $1 billion of the leveraged buyout, three people familiar with the plan said.

A slump in demand for debt sold by buyout firms and the worst U.S. housing market in 16 years threatened the sale of HD Supply to Bain Capital LLC, Carlyle Group and Clayton Dubilier & Rice. Home Depot, which in June agreed to sell the unit for $10.3 billion, will buy back a 13 percent stake, said two of the people, who declined to be identified because the accord hadn't been signed. The buyers negotiated a reduction after their lenders demanded better terms, the people said.

``We had a really unprecedented collapse in the market, and you couldn't really just walk away from the deal,' said Dan Poole, who helps manage $31 billion at National City Bank in Cleveland including Home Depot shares. ``Private equity didn't have an out and the banks' reputations depended on it.''

Banks, which usually finance transactions and then offload the debt into the capital markets, are pushing for lower purchase prices on buyouts because of growing concern they will be left with billions of dollars of loans.

Focus on Retail

The private-equity firms also agreed to invest an additional $450 million in the business, $150 million each, bringing their total equity commitment to $2.4 billion.

An announcement may come today, the people said.

Home Depot shares rose 57 cents, or 1.6 percent, to $35.25 at 4:01 p.m. in New York Stock Exchange composite trading. They have declined 12 percent this year.

Home Depot, the second-largest U.S. retailer, is selling HD Supply to focus on its home-improvement stores. The unit provides tools and lumber to builders and accounts for about 13 percent of the Atlanta-based company's sales.

Home Depot said Aug. 9 the price for the division might be reduced from the original amount, and later extended the date to complete the deal to Aug. 23 as lenders became more reluctant to finance the transaction, as they have in other recent sales.

DaimlerChrysler AG agreed earlier this month to take on $1.5 billion in debt to support the sale of Chrysler to Cerberus Capital Management after investors rejected bond and loan packages. Daimler is keeping a 19.9 percent stake in Chrysler.

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

Top-Level Executives

The negotiations intensified on Aug. 22 and included some of the banks' top executives, including Lehman Chief Executive Officer Richard Fuld, his counterpart at JPMorgan, Jamie Dimon, and JPMorgan's co-head of investment banking, Steven Black.

Other officials engaged in the talks were JPMorgan Vice Chairman James Lee, Home Depot CEO Frank Blake and Clayton Dubilier CEO Donald Gogel.Tim Ingrassia, a banker at Goldman Sachs Group Inc., joined the discussions when his firm was hired by Home Depot after conflicts forced Lehman to step aside as the company's adviser, two people familiar with the matter said.

The threat of legal action should the sale agreement have collapsed helped motivate Home Depot, the banks and the buyout firms to reach a new accord, people familiar with the situation said. The private-equity firms and their lenders were also concerned that a failed deal may affect other pending buyouts, including TXU Corp. and First Data Corp., the people said. The group reached a tentative accord yesterday evening, the people said.

Stock Buyback

Home Depot spokeswoman Paula Drake declined to comment. Representatives of the private-equity firms and banks wouldn't comment publicly or didn't return calls seeking comment.

Home Depot planned to use the sale proceeds to help fund a $22.5 billion stock buyback. The company said it might have trimmed the buyback if the sale fell through.

The buyback is part of Blake's effort 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.

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

Last Updated: August 27, 2007 16:05 EDT