November 8, 2019 / 12:35 PM / 9 days ago

Lenders ponder Walgreens' record buyout

LONDON, Nov 8 (LPC) - Banks are approaching private equity firms on possible financings backing a potential US$80bn sale of Walgreens Boots Alliance to private equity firms that would be the largest buyout ever. But with US$50bn of debt and around US$30bn of equity required, bankers are questioning whether a deal is even possible.

Walgreens has been exploring whether to go private following private equity interest in the US drug store chain, tasking investment bank Evercore Partners with exploring whether a deal can be put together. The pharmacy group’s market capitalisation at the close of trading on November 5 was US$52.64bn.

With US$16.8bn of existing debt and US$1bn of cash on balance sheet, the company is valued at US$75bn-$85bn, taking into account a premium, bankers said.

“The debt and equity are a pretty challenging quantum but to contemplate doing it is a sign that we are at a point where bankers, companies, corporates and sponsors are thinking it is possible. We are in an environment where it is worth exploring,” a senior capital markets banker said.

In a sale scenario, Walgreens CEO Stefano Pessina could roll over the 16% of Walgreens he controls. That stake is valued at around US$8.5bn.

Even so, it is a huge amount of equity to raise, even taking into account sponsors’ desires to seek jumbo trades and the tremendous fire power they are sitting on. The likelihood is that private equity firms would need to team up.

“The equity cheque is huge. Sponsors have a lot of money and dry powder but there are also limits on how much exposure they want to each credit and it begs the question how many firms would have to team up and how practical that is,” a capital markets head said.

A second capital markets head said: “Our experience is that private equity will go together two ways but it is not like 2006/2007. The days of the massive consortiums are over.”

BE PREPARED

Bankers are already busy working on financing scenarios, but even assuming the equity cheque is do-able, the next question is whether there is enough liquidity in the leveraged markets.

Some US$50bn of cash would be the largest leveraged buyout financing to date and will require every pool of capital, from bonds to loans in US dollars and euros. It equates to around 6.5 times Walgreens’ US$7.6bn Ebitda.

The European leveraged loan and high-yield bond market has maximum capacity of €5bn-€10bn, depending on credit rating. Leveraged loan capacity is around €2bn-€2.5bn for Single B rated companies, with an additional €1bn for a Double B rated credit. While for high-yield bonds capacity is €1.5bn-€2bn for Single B, with an additional €1bn-€1.5bn for a Double B rating. Additional cash could be raised from banks, via amortising loans.

That would leave US$40bn left for the US dollar market, which is suffering from a liquidity crisis in Single B loans.

“It is always remarkable when super big, headline grabbing deals come in. There are pockets of liquidity you’ll find that you wouldn’t normally take into account for market capacity estimations. The US market is toppy but it could come back,” the first capital markets head said.

A US$13.5bn-equivalent loan and bond financing backing a Blackstone-led consortium’s buyout of a 55% stake in Refinitiv managed to attract US$1bn-equivalent from asset managers and Chinese banks that were not typical buyers of leveraged loans, a senior banker said.

“In the Refintiv deal, US$1bn of loans was placed with big asset managers and Chinese banks that no one would have accounted for prior to syndication. Sometimes when you hear big names you can’t rule anything out, but Walgreens is not an easy or obvious one given its massive size,” the first capital markets head said.

The only way to raise such a large amount of debt is to get the ratings up to as near investment-grade as possible to deepen the pool of liquidity, several bankers said.

SHOWING THE WAY

A US$38bn financing backing computer company Dell’s US$60bn merger with data storage company EMC Corp in 2016 is being used as benchmark for a Walgreens financing.

“US$50bn is an incredible stretch. The only way to do it is if you have investment-grade structured loans and bonds and a whole bunch of subordinated, lower-rated holdco debt, like Dell. You could even put in preferred behind it and have three layers, but a classic LBO will not work,” the second capital markets head said.

A second senior banker said: “If it were to happen, assuming someone has enough equity, it will end up being a hybrid Double B to increase the debt pile as a standalone Single B will be a long way off from where it needs to be. Walgreens is US$12bn beyond Dell and we are no way in as strong a market now compared to then, given US outflows.”

Walgreen Boots Alliance has been closing stores and launching cross-selling partnerships with companies such as grocer Kroger and weight loss clinic operator Jenny Craig, as it seeks to cut costs and boost its growth prospects.

Walgreens paid US$23bn for UK chemist chain Alliance Boots in a two-part deal that completed in 2014.

Prior to that, a £9.02bn loan that backed the £11bn buyout of Alliance Boots by KKR and Pessina in April 2007 was the largest European LBO ever. It was stranded in mid-2007 by the credit crunch, with banks unable to sell it down initially and it was seen as the deal that closed the leveraged market until the crisis had run its course. (Editing by Christopher Mangham)

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