Unlock the Editor’s Digest free of charge
Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
Walgreens Boots Alliance’s shareholders are being supplied 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 commonly 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. A number of weeks in the past, these bonds have been buying and selling for simply 65 cents on the greenback, reflecting that modest coupon and Walgreens’ glum prospects.
Sycamore’s provide may save the day for these bondholders. Buyers and attorneys are poring over paperwork to see what borrowings Walgreens can go away excellent, and which have to be retired at face worth, to be refinanced with costlier paper. Primarily, if Walgreens’ credit standing falls to “junk” standing, bondholders may drive the corporate to purchase again the bonds at par.
Buyers appear to suppose Sycamore will likely be compelled to purchase them out as ranking businesses have already warned on downgrades. The worth of the 2050 notes has risen to greater than 90 cents. Sycamore, although, has its personal recreation 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 thus far recommend its financing construction is fairly aggressive. Out of an all-in value of $23.7bn, Sycamore is committing simply $2.5bn of fairness. Walgreens chair Stefano Pessina has pledged to rollover his current 17 per cent stake, price 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 non-public credit score corporations. Assuming that comes with a mean 10 per cent rate of interest, Walgreens wants to seek out $2bn a 12 months. That’s about half of the money analysts count on its operations to generate in its subsequent monetary 12 months, after taking out capital expenditure, in line with 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 property, which may minimize its money owed, though additionally sacrifice the hooked up money move. It might additionally situation debt repayable in additional debt — so-called pay-in-kind loans, although these can become pricey in the long term. Sycamore may even throw in additional fairness to keep away from the triggering debt downgrade.
Most probably, Sycamore will simply purchase the present bonds again — and attempt to get one of the best deal it may issuing extra versatile, albeit costlier, debt. Shareholders, who’ve misplaced about two-thirds of their funding up to now 5 years, will in all probability be grateful to see a deal undergo in any respect — even when it’s a group of bondholders who take dwelling the sweetest premium.
This text has been amended to replicate that Walgreens would want to seek out $2bn a 12 months to service curiosity funds, not $200mn
