So much for walking away from Home Depot.

Though as of this writing no formal agreement was inked, Reuters and other news outlets reported that Home Depot, the private equity buyers,  and the banks agreed to cut the size of the supply division sale to $8.5 billion from $10.3 billion. Upped equity checks and debt assumption were also part of the new deal hashed out over the weekend.

Coming to such agreement was a long and difficult process, but at least it shows that Private Equity Inc.  was not willing to walk away from an LBO deal under fire. If LBO firms were planning to hit the exits on any pending deal, this would appear to be the one.

A theory has persisted around Wall Street that given the impact of the credit crunch and the freeze it’s spread across Wall Street’s lending desks, private equity buyers would simply pay a reverse break up fee and walk away.

Reuters ran this theory by a few Wall Street sources who threw cold water on it, saying that the reputational damage the buyout firms in particular would suffer would be too great. Hypothetically, what would Henry Kravis say to the next CEO he approached about a deal having just backed out of the last one, so the thinking goes. And imagine the lawsuits on a $10 billion plus deal that goes up in smoke?

Deal Journal points out that walking away has happened before and doesn’t appear to have caused permanent damage.

However, a high level banker gave Reuters another reason to doubt the theory. The incentive for buyout firms to walk away comes only with cases where the company they plan to buy has suffered a severe falloff in its business prospects.

That would fit the description of Home Depot Supply, for sure, but do others come to mind? Will Christopher Flowers, known to be among the smartest financial sector bankers around, really back out of a Sallie Mae buyout, or is a game of chicken going on?

The point is, in the LBO deals of the past two years, including the ones announced up until a few weeks ago, the private equity firms got the best terms they’re likely to get. Why walk out on a deal that banks have loaned them huge sums for cheap and with hardly any restrictions? It’s not the private equity firms stuck with the debt, it’s the banks. Yes, the buyout firms need the banks and they may agree to add a covenant here or there to take some pressure off their lenders, but bailing banks out of signed deals is not something their limited partners pay 2 and 20 for. 
    
Take First Data and TXU, for example. These are large LBOs where there are concerns the banks will get stuck with the debt and lose money on the transaction. The banks may like to walk away, but why the private equity firms? First Data, as a payment processor, generates huge amounts of cash, making it prime turf for an excellent LBO with good return potential.
   
TXU is beholden to fluctuating energy prices, sure, but it also a big cash generator. And it appears to be the kind of asset both KKR and TPG would be happy to hold onto for an extended period of time, depending on where energy prices sit.

Walk away? If things get ugly with some of the large buyouts in the pipeline–and they will–you’ll see some high-level and possibly ugly negotiations, but probably not a getaway.