$\newcommand{\bra}[1]{\left<#1\right|}
\newcommand{\ket}[1]{\left|#1\right>}$Consider the following linear operator:
$$
U = \left[
\begin{matrix}
a & 0 & 0 & 0 & 0 & 0 & 0 & c\\
0 & 1 & 0 & 0 & 0 & 0 & 0 & 0\\
0 & 0 & 1 & 0 & 0 & 0 & 0 & 0\\
0 & 0 & 0 & 1 & 0 & 0 & 0 & 0\\
0 & 0 & 0 & 0 & 1 & 0 & 0 & 0\\
0 & 0 & 0 & 0 & 0 & 1 & 0 & 0\\
0 & 0 & 0 & 0 & 0 & 0 & 1 & 0\\
b & 0 & 0 & 0 & 0 & 0 & 0 & d\\
\end{matrix}
\right] \tag{1}\label{1}
$$
This is a 2-level matrix, acting non-trivially only on states $\ket{000}$ and $\ket{111}$. You are asking to show that this can be decomposed into the following 3 steps:
- Step 1: Permute the computational basis states such that $\ket{000}$ becomes $\ket{011}$ but $\ket{111}$ remains $\ket{111}$.
- Step 2: Apply a single qubit gate on the first qubit if the second and third qubits are 1.
- Step 3: Undo step 1.
To prove that this is possible, we can write the unitary operator for each step, multiply them together and see that the result is equal to $U$.
Step 1: This can be given the following representation:
$$
S = \underbrace{\ket{011}\bra{000} + \ket{000}\bra{001} + \ket{001}\bra{011}}_{\text{permutation of Gray codes}} + \\
+ \underbrace{\ket{010}\bra{010} + \ket{100}\bra{100} + \ket{101}\bra{101} + \ket{110}\bra{110} + \ket{111}\bra{111}}_{\text{trivial action}}\tag{2}\label{2}$$
This is just a permutation of the computational basis states. Its main purpose is to ensure that $\ket{000}$ becomes $\ket{110}$ but $\ket{111}$ remains $\ket{111}$. There are also the transitions $\ket{001} \rightarrow \ket{000}$ and $\ket{011} \rightarrow \ket{001}$ which I think only serve the purpose of more efficient circuit design because they allow an implementation which uses only CNOT gates without any additional working qubits. This is explained in Nielsen & Chuang 10th edition on pages 192-193.
Step 2: We condition the single qubit gate's action on the second and third qubits being 1. There are only 2 states of this form: $\ket{011}$ and $\ket{111}$. Consider how a single qubit operation on the first qubit acts on these states:
$$
\ket{011} \rightarrow \left(a\ket{0} + b\ket{1}\right)\ket{11} = a\ket{011} + b\ket{111}\\
\ket{111} \rightarrow \left(c\ket{0} + d\ket{1}\right)\ket{11} = c\ket{011} + d\ket{111} \tag{3}\label{3}
$$
All other states are left alone. Now we can write the full action of this single qubit gate as:
$$
\bar{U} = \underbrace{\left(a\ket{011} + b\ket{111}\right) \bra{011} +
\left(c\ket{011} + d\ket{111}\right) \bra{111}}_{\text{action of single qubit gate}} + \\
+ \underbrace{\ket{000}\bra{000} + \ket{001}\bra{001} + \ket{010}\bra{010} + \ket{100}\bra{100} + \ket{101}\bra{101} + \ket{110}\bra{110}}_{\text{trivial action}} \tag{4}\label{4}
$$
Step 3: We just need to undo step 1., which means that we need to take the $S$ unitary's inverse, which is its Hermitian conjugate:
$$
S^{\dagger} = \underbrace{\ket{000}\bra{011} + \ket{001}\bra{000} + \ket{011}\bra{001}}_{\text{undoing permutation of Gray codes}} + \\
+ \underbrace{\ket{010}\bra{010} + \ket{100}\bra{100} + \ket{101}\bra{101} + \ket{110}\bra{110} + \ket{111}\bra{111}}_{\text{trivial action}}\tag{5}\label{5}$$
We want to show that $S^{\dagger}\bar{U}S=U$. Calculating $\bar{U}S$, we get:
$$
\bar{U}S = \left(a\ket{011} + b\ket{111}\right) \bra{000} +
\left(c\ket{011} + d\ket{111}\right) \bra{111} + \\
+ \ket{000}\bra{001} + \ket{001}\bra{011} + \ket{010}\bra{010} + \ket{100}\bra{100} + \ket{101}\bra{101} + \ket{110}\bra{110} \tag{6}\label{6}
$$
Left multiplying this by $S^{\dagger}$ yields:
$$
S^{\dagger}\bar{U}S = \underbrace{a \ket{000}\bra{000} + b\ket{111}\bra{000} + c\ket{000}\bra{111} + d\ket{111}\bra{111}}_{\text{non-trivial action}} + \\
+ \underbrace{\ket{001}\bra{001} + \ket{010}\bra{010} + \ket{011}\bra{011} + \ket{100}\bra{100} + \ket{101}\bra{101} + \ket{110}\bra{110}}_{\textrm{trivial action}} \tag{7}\label{7}
$$
Now compare \eqref{7} with \eqref{1}. By inspection we can see that they yield the same result for each computational basis states. In particular, $\ket{000} \rightarrow a\ket{000}+b\ket{111}$ and $\ket{111} \rightarrow c\ket{000}+d\ket{111}$. All other states are left alone. Therefore, \eqref{7} and \eqref{1} are equal.