Will Walgreens Shatter the Private Equity LBO Record?

KKR and other PE Firms are Eyeing the Pharmacy Benefits Giant

Walgreen Boots Alliance is talking to private equity firms about going private. CNBC reports that KKR is one of several shops thinking about buying the $55 billion company.

Such a deal would be a massive purchase for one private equity shop. It could also easily break the record for the largest leveraged buyout of all time.

However, a number of factors could easily derail any possible deal.

KKR and Walgreens Boots Alliance

Early speculation centers around KKR. And for good reasons.

KKR purchased Alliance Boots in 2007 alongside a group of investors that included Stefano Pessina, then the company’s executive chairman.

In 2012, Walgreens purchased a 45% stake in Alliance Boots, then Europe’s largest pharmaceutical wholesaler. The $6.7 billion deal included an option to purchase the remaining stake. Walgreens executed that deal in 2014 for $15.3 billion. Pessina would go on to become the CEO of the larger company and has about a 16% stake.

KKR, still a shareholder, quadrupled its cash investment thanks to the deals.

Why Would Walgreens Go Private?

According to Lauren Hirsh and Angelica Lavito at CNBC, Walgreens has a few incentives to go private. First, shares have slumped more than 20% over the last year. The broader healthcare retail and pharmacy benefits sectors remain under pressure. A deal would give it the chance to get out of the public eye as it shifts its strategy and focuses on the future. This future could include a broader economic downturn, increased regulatory oversight from a new administration, or any other known-unknowns that may emerge.

That said, the company does carry a very large amount of debt on its balance sheet. At $17 billion, this level of debt could cause many private equity shops to lose interest, especially with the prospect of an Elizabeth Warren presidency. The Democratic candidate has a targeted regulatory plan for private equity with one proposal that would put PE firms on the hook for any debt they inherited from a target company.

According to the same report, Walgreens is working with Evercore to explore potential options. Shares of WBA stock have been climbing since details first emerged around a possible deal.

Related: 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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