UPDATE 4-Private equity firms back out of Harman deal

(Updates with Harman statement, stock halt)

By Michael Flaherty

NEW YORK, Sept 21 (Reuters) - Harman International Industries Inc (HAR.N: Quote, Profile, Research, Stock Buzz) said its private equity buyers are pulling out of their $8 billion buyout deal, a severe blow to the company whose shares fell more than 25 percent on Friday.

The audio equipment maker said that Kohlberg Kravis Roberts & Co LP and Goldman Sachs Group Inc's (GS.N: Quote, Profile, Research, Stock Buzz) private equity arm believe a "material adverse change" occurred in Harman's business and that it breached the merger agreement.

Harman said in a one paragraph release that it disagrees such a change occurred and that it did not violate the buyout contract.

KKR and Goldman's decision not only impacts Harman, but could have broader repercussions for the firms and the leveraged buyout sector, as it comes at a sensitive time for the industry. The credit crunch has threatened to scuttle several leveraged buyout deals, forcing banks stuck with loans to renegotiate deals and straining relations among Wall Street, private equity buyers and the companies involved.

The crunch has caused investors, bankers and lawyers to scour merger agreements in search of ways for buyers to get out of deals, or sellers to keep them in tact.

"The world has changed," said Dan Fuss, vice chairman at Loomis Sayles in Boston, who helps oversee $77 billion in fixed-income assets. "In this current market, I don't know that the economics made sense anymore and so that caused it to fall apart. I strongly suspect a number of others are not going to make it."

But the Harman bail-out looks centered on the financial conditions of the company itself, not the lending agreement, and marks the first time in a two-year private equity acquisition frenzy that buyers walked out of a major deal.