Boots sale stumbles against limited financing availability

British supermarket chain Asda and private equity firms Apollo Global Management and Sycamore Partners are said to be circling the auction of the Walgreens Boots Alliance-owned business, which is in the second round. With a mooted enterprise value of around GBP 6bn (USD 7.8bn), any bidder would be required to raise a sizeable debt package that could include roughly GBP 3bn of senior debt, one of the sources said.

Although banks maintain the capacity to underwrite, sources said that many are less inclined to underwrite large tickets amid volatility caused by Russia’s invasion of Ukraine.

“It’s not that liquidity is not here, it’s just that people don’t have the conviction,” one of the sources said. “People are sitting on their money because they are scared of the market going down, and until the situation in Ukraine stabilizes, you don’t really know where the bottom of the market is.”

The launch of a full-scale war has brought European primary loan issuance to a halt. High-yield bond issuance was already facing headwinds from rising inflation and interest rates and had not seen new issuance since mid-February. High-yield funds suffered an outflow of USD 2.394bn for the weekly period ending 11 March, representing their largest outflow since March 2020, according to Bank of America data.

As a health and beauty retailer as well as a pharmacy chain, the sector in which Boots operates is adding another layer of complexity for potential investors, the sources said. “With regards to Boots, there is a bit of fatigue with investors given they are overweight with large UK retail situations,” one of the sources said.

The underwriters of Clayton, Dubilier & Rice’s GBP 9.7bn acquisition of UK grocery chain Morrisons are still sitting on a large portion of a GBP 6.6bn-equivalent bond and loan package. After being postponed in December on the back of market volatility, the highly anticipated deal was expected to launch towards the end of January following a Christmas trading update, as reported. At the beginning of February, the UK domestic press reported that the underwriters privately sold around GBP 1.2bn in junior notes to credit funds. The arrangers are said to be considering downsizing the sterling-denominated component of the yet-to-be-sold on debt by GBP 500m and concurrently increase the senior secured note or euro-denominated leveraged loan, according to a separate press report.

Syndication sagas
The past struggle to offload a GBP 9.02bn debt package that funded the GBP 11.1bn take-private of Alliance Boots by KKR and Stefano Pessina, the company’s executive deputy chairman, in July 2007 may still play out in the memory of some banks.

Syndication of what was at the time one of the largest sterling-denominated loans coincided with the US subprime mortgage crisis that triggered a credit crunch, leaving most of the debt to sit on the balance sheets of the eight-bank underwriting group for over a year.

Recent headlines around Boots have focused on additional challenges to reaching a valuation above GBP 6bn, including that the pension scheme trustee would be targeting a significant funding commitment from a new owner.

Walgreens Alliance Boots initiated a strategic review of the Boots business following a shift in its strategic direction to focus on US health care. In its presentation at a JPMorgan conference in January, the group said Boots was growing strongly and driving international adjusted operating income rise of over 88% in the first quarter.

For fiscal year 2022, the group expects Boots to be the major contributor to drive its international segment sales up 9% to 11% and segment international adjusted operating income up over 50%.

Walgreens completed a two-step merger with Alliance Boots in December 2014, after exercising a call option to acquire the remining 55% stake in the business in exchange for approximately USD 5.3bn in cash and 144.3 million shares of its common stock.

The US drugstore chain bought the initial 45% stake in Alliance Boots in August 2012 from KKR and Stefano Pessina for around USD 6.7bn in cash and stock (comprising USD 4bn in cash and 83.4m shares).

In June last year, Walgreens Alliance Boots sold its drug wholesaler Alliance Healthcare to AmerisourceBergen for total consideration of approximately USD 6.5bn, made up of USD 6.275bn and two million shares of AmerisourceBergen common stock.

Walgreens Alliance Boots, Asda’s part owner TDR Capital and Apollo declined to comment. Sycamore Partners did not respond to a request for comment.

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• Buyouts
• UK / Ireland
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• United Kingdom