Unlock the Editor’s Digest totally free
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 among 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 usually issued extremely rated debt, benefiting 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 had 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. Traders and legal professionals are poring over paperwork to see what borrowings Walgreens can depart excellent, and which should be retired at face worth, to be refinanced with costlier paper. Primarily, if Walgreens’ credit standing falls to “junk” standing, bondholders may power the corporate to purchase again the bonds at par.
Traders appear to suppose Sycamore will likely be pressured to purchase them out as ranking companies have already warned on downgrades. The worth 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 date 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 well-liked 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 search out $2bn a 12 months. That’s about half of the money analysts anticipate 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 reduce its money owed, though additionally sacrifice the connected money stream. It might additionally situation debt repayable in additional debt — so-called pay-in-kind loans, although these can turn into expensive in the long term. Sycamore may even throw in additional fairness to keep away from the triggering debt downgrade.
Most definitely, Sycamore will simply purchase the prevailing bonds again — and attempt to get the very 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 search out $2bn a 12 months to service curiosity funds, not $200mn
