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Walgreens Boots Alliance shareholders are offered a 63% premium when selling to private equity company Sycamore Partners. However, some of the company’s creditors may be lined up for a similar jackpot.
When drugstore chains, which included stubborn boots in the UK, boasted a market capitalization of hundreds of billions of dollars, they used low interest rates to issue regularly high valuation debts. One bond in April 2020 had a coupon of 4.1% and a maturity of 30 years. A few weeks ago, these bonds were trading for just 65 cents in dollars.
Sycamore offers can save those bondholders’ days. Investors and lawyers stare at the document to see what borrowings Walgreens can keep. Essentially, if Walgreens’ credit rating falls into “junk” status, bondholders can force the company to buy back the bond at face value.
Investors appear to think Sycamore will be forced to buy them as rating agencies have already warned about downgrades. Note prices for 2050 have risen to over 90 cents. However, Sycamore has its own game. If less cash Walgreens can spend on interest, they will increase the equity return of owners.
Sycamore’s previous disclosures suggest that its funding structure is rather offensive. Of the $23.7 billion all-in-cost, Sycamore has pledged just $2.5 billion in shares. Walgreens Chairman Stefano Pessina has pledged to roll over the existing 17% stake worth $2.1 billion.
Sycamore says it has secured around $20 billion with solid debt and preferred equity commitments from a series of large banks and well-known private credit companies. Assuming that it has an average interest rate of 10%, Walgreens needs to find $2 billion a year. According to LSEG, about half of cash analysts expect their operations to generate in the next fiscal year after making capital expenditures.
There is room for flashy footwork. A portion of that debt is a line of credit that may not be withdrawn. Walgreens tries to sell assets, which could reduce liabilities, but also at the expense of attached cash flow. They may also issue debts that can be repaid with more debts. Sycamore has even been able to put in more equity to avoid trigger reductions.
Perhaps Sycamore will simply buy back existing bonds. And they try to get the best deals that can be issued something more expensive, but more flexible. Shareholders who have lost about two-thirds of their investment in the past five years will appreciate seeing the trade experienced, even if it is a group of bondholders who have brought home the sweetest premium.
This article was revised to reflect that you need to find $2 billion a year for your interest payments, not $200 million.
sujeet.indap@ft.com
