Schwarzman Adds To Skepticism Around The Walgreens Boots LBO

Stephen Schwarzman, who runs Blackstone Group,  thinks the Walgreens Boots privatization might be just too big.

“It’s a huge stretch doing things over $50 billion,” Schwarzman remarked at a New York event. The size of the Walgreens Boots LBO can be estimated from the company’s market cap of $53 billion. It also carries a debt of $16.8 billion.

The media have reported that Walgreen has been mulling a deal to take the drugstore chain private in an LBO that could assume historic proportions. According to reports, Walgreens CEO Stefano Pessina has been making the rounds of private equity firms in recent months to gauge their interest in the deal. Apparently, these entities were not overly enthusiastic given the size and complexity of the transaction. Walgreen’s slowing growth, and uncertain industry prospects added to worries.

“You need at least $20 billion of equity. Could you find that in today’s world? Maybe,” Schwarzman said at the event. “Thirty billion of debt you could probably get. It’s a little tougher on the equity.”

Wall Street not exactly gung-ho

Moreover, analysts at top Wall Street firms are not too convinced either on the merits of the Walgreens Boots LBO.

According to Ralph Giacobbe at Citi, the deal is “difficult to envision” given its size, the pressures facing the business, and “years worth of cost reduction and financial engineering.”

Deutsche Bank: “It’s a great story until you do the math,” and that funds would be a problem.

Raymond James also gave a thumbs-down to the transaction citing its sheer size, the absence of owned real estate, and deteriorating fundamentals.

Opioid settlements cast a shadow

Further, PE players may also be hesitant to finance the deal, given the risk of potentially large settlements due to opioid sales.

Last month three distributors, including AmerisourceBergen, agreed to pay $215 million to two Ohio counties. The payment was in the settlement of a looming opioid trial. Walgreens owns 27% of AmerisourceBergen.

Moreover, Walgreens has already admitted that it is a “defendant in numerous litigation proceedings relating to opioids.”

[Related Story: Private Equity Firm KKR Snaps Up Campbell’s International Business for $2.2 billion         ]

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November 20, 2019

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