Unlock the Editor’s Digest free of charge
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
Walgreens Boots Alliance’s shareholders are being provided a 63 per cent premium in the event that they sell to private equity firm Sycamore Partners. However a few of the firm’s collectors may very well be in line for the same bonanza.
Again when the pharmacy chain — which incorporates UK high-street stalwart Boots — boasted a market capitalisation within the tens of billions of {dollars}, it frequently issued extremely rated debt, profiting from low rates of interest. One bond in April 2020 got here with a 4.1 per cent coupon and a 30-year maturity. Just a few weeks in the past, these bonds had been buying and selling for simply 65 cents on the greenback, reflecting that modest coupon and Walgreens’ glum prospects.
Sycamore’s supply might save the day for these bondholders. Buyers and attorneys are poring over paperwork to see what borrowings Walgreens can depart excellent, and which should be retired at face worth, to be refinanced with dearer paper. Basically, if Walgreens’ credit standing falls to “junk” standing, bondholders might drive the corporate to purchase again the bonds at par.
Buyers appear to assume Sycamore can be pressured to purchase them out as ranking businesses have already warned on downgrades. The value of the 2050 notes has risen to greater than 90 cents. Sycamore, although, has its personal sport to play: the much less money Walgreens can spend on curiosity, the extra there may be to bolster its would-be proprietor’s fairness returns.
Sycamore’s disclosures to this point counsel its financing construction is fairly aggressive. Out of an all-in price of $23.7bn, Sycamore is committing simply $2.5bn of fairness. Walgreens chair Stefano Pessina has pledged to rollover his present 17 per cent stake, value as a lot as $2.1bn.
Sycamore says it has secured roughly $20bn in agency debt and most popular inventory commitments from a sequence of huge banks and well-known personal credit score companies. Assuming that comes with a mean 10 per cent rate of interest, Walgreens wants to seek out $2bn a yr. That’s about half of the money analysts count on its operations to generate in its subsequent monetary yr, after taking out capital expenditure, based on LSEG.
There’s room for fancy footwork. A few of that debt is credit score traces that may not be drawn. Walgreens will attempt to promote belongings, which might minimize its money owed, though additionally sacrifice the hooked up money move. It could additionally concern debt repayable in additional debt — so-called pay-in-kind loans, although these can change into pricey in the long term. Sycamore might even throw in additional fairness to keep away from the triggering debt downgrade.
Most certainly, Sycamore will simply purchase the prevailing bonds again — and attempt to get the perfect deal it may well issuing extra versatile, albeit dearer, debt. Shareholders, who’ve misplaced about two-thirds of their funding previously 5 years, will most likely be grateful to see a deal undergo in any respect — even when it’s a group of bondholders who take residence the sweetest premium.
This text has been amended to replicate that Walgreens would want to seek out $2bn a yr to service curiosity funds, not $200mn
