What if Edward Heath agreed to Jeremy Thorpe's conditions and a coalition government is formed?
What would of happened if Thorpe's electoral reforms (STV) were introduced?
How would the Thorpe Affair affect the coalition?
Would the Labour party result to infighting? (or could they unite under someone like Callaghan?)
Could Scottish and Welsh Devolution happen?
What would happen to Thatcher?
What would happen to David Steel? (does the alliance with the SDP form in this timeline?)
Please discuss.
I'll take them in order.
(1) Thorpe himself coveted this outcome desperately, but the real change needs to be made with Heath, not Thorpe. Heath did
not want it because he found Thorpe both politically and personally suspect (Heath, like Wilson, also knew full well what was in Thorpe's MI5 file but plenty of people then had... fulsome MI5 files of different description, the issue with Thorpe was that he seemed vain and self-destructive enough even then -- his career had already nearly crashed and burned for purely party-political reasons before his wife's tragic death and the February election breathed some life into it -- that some of that stuff would surface eventually.) IOTL Heath chose deliberately to make a coalition agreement unacceptable to the Liberals' constituency base so that he could avoid working with Thorpe. Change Heath's heart, or gut, and you can change a lot here but those bits of anatomy and their owner (Heath) are among the most opaque and casually spiteful in British politics.
(2) Both Heath and Wilson were likely to poison-pill an STV vote unless the "big brother" in the coalition (Tories or Labour) was so unpopular that catering to public opinion demanded it. Turkeys really don't vote for Christmas. Devolution is actually likelier, especially from a Conservative-Liberal coalition where the Tories can then gerrymander reductions in Scots and Welsh representation at Westminster to cut back Labour's base of seats.
(3) China Syndrome time.
In government, Thorpe flails about briefly trying to deny and resist whatever it is that goes down (or blows up) then collapses under his own deflated ego. David Steel is probably pockmarked with shrapnel for not managing Thorpe better or getting him out of the way before the avalanche of skeletons from Thorpe's closet drowned everybody, and Ted Heath finds yet another way to look bad to his own party. Opportunistic minor parties join Labour, wronged constituency Liberal MPs who feel betrayed by Thorpe pissing away their first real power in decades, and the occasional machiavellian "Dry" all to vote for no confidence and it's back to the polls. Also
sayonara Mr. Heath.
(4) Labour can
always resort to infighting

The interesting question is, if Wilson smelled blood around Thorpe, would he
really step down because he'd lost in February or would he have to be pushed? The election that followed would be more hard-fought than IOTL, definitely. There's more at stake in some ways -- not just an inheritance from a sitting PM but a chance to set your stamp on things. One of the most interesting questions is whether Foot will run to keep the Labour Left from fractalizing (even more than the left-right split the real danger for Labour's solidity was, barring the presence of Foot, having the Left implode in shards.) Callaghan is still the likeliest winner because Woy has shot his bolt by that point but there are lots of interesting compromise candidates out there including dear old Ed Short, the
actual deputy leader at the time.
(5) Definitely. As I say, even the Tories might go that route for machiavellian reasons (buying off the Liberals without STV and gerrymandering seat reductions in Labour heartlands because of the new devolved assemblies.) Labour especially under Callaghan was actually
more resistant to the idea and did so because they had few political options other than to become more unpopular. My own .02 is that devolution is a good deal more likely (it still has to go to a vote, either in Commons or with the public Common Market-style) than STV no matter where Jeremy Thorpe coalesces
(6) If CHIEF KEITH still not only shoots himself in the foot but more or less blows off both legs at the hips as he did IOTL, she's still the princess-over-the-water as long as Heath lasts. We like to say she was not the most likely outcome but when you look back on the list of candidates she starts to look damned near inevitable. Willlie Whitelaw is still the prohibitive favorite but like a lot of prohibitive favorites he depends entirely on conventional wisdom which makes him desperately fragile in practice --
all the non-Thatcherites need to line up behind him or he's done. Reggie Maudling had too many skeletons (which multiplied during the Seventies and showed up in newspapers) and too many enemies to truly make it in. Joseph had as I say recused himself through verbal stupidity much as Powell was River-Tibered by this point. Sir Geoffrey Howe is still a dead sheep. The likes of Norman Tebbit don't have the MPs in the lobby even if they have the bottle for it. Airey Neave knows too many people think he's past it and would rather play kingmaker for the right as he did IOTL than go there himself. Thorneycroft has too
much track record, rather than Thatcher's relatively-little. It took Neave's genuinely great skills as a parliamentarian and worker (and counter) of the lobby, but Thatcher was the right "Dry" at the right time if you were going to take Heath's scalp.
(7) Depends on how an "alternate Thorpe Affair" goes down. At best Liberals flee to him because they feel there's no other good option and public judgment is tepid at best. At worst he gets blamed for looking the other way or enabling Thorpe (if we escalate to an airing of Big Cyril's crimes Steel
really looks set to crash and burn.) He also faces the icy disdain of All The Tory Grandees for being a rotten stableboy to the Liberals' prize steed (Thorpe) and screwing up the coalition, giving Labour an easy "We're Not The Guys Who Did Bad Things" in with the electorate. None of this is excellent news for David Steel. Then it's does Grimond make a comeback as Liberals flee to the familiar under stress, or does a new face crop up.
There you go. My .02, nothing more.