KKR Gets Rich Prescription for Top-of-Market LBO

Agenda-Setting Financial Insight.
June 19 2012 1:26 PM

KKR Gets Rich Prescription for Top-of-Market LBO

73550120
Walgreen’s two-stage acquisition of its European rival Alliance Boots should more than double the investment KKR and its partners made at the peak of the leveraged buyout frenzy.

Photo by Leon Neal/AFP/Getty Images

KKR has found the right formula to exit Alliance Boots, its top-of-the-market drugstore deal. Walgreen’s two-stage acquisition of its European rival should more than double the investment KKR and its partners made at the peak of the leveraged buyout frenzy. What the U.S. drug chain’s investors will get for their money - as much as $16.2 billion - is harder to fathom. 

The first stage sees Walgreen pay about $6.7 billion in cash and stock for 45 percent of Boots. The firm’s ownership is currently split fairly equally between KKR funds, Boots Executive Chairman Stefano Pessina and outside investors. Pessina, who will become a Walgreen director, takes proportionately more stock than the financial investors. 

Two and a half years on, Walgreen can buy the rest of the company for about $9.5 billion at current share prices. Assuming the second stage completes, and considering a minority stake in a Swiss firm that is excluded from the current deal, KKR should make about 2.2 times its original investment in dollar terms. That’s pretty good for a boom-year deal, especially in the cut-throat world of European retail. If Walgreen stock rises, the ultimate return could be higher. 

The benefits to Walgreen shareholders from supporting a risky cross-border acquisition aren’t as obvious. With a $26 billion market cap, Walgreen is currently valued at an enterprise value of about six times EBITDA, and paying a multiple almost twice as high for Boots. The hefty price tag might make sense if promised synergies - up to $150 million over the first year and $1 billion by the end of 2016 - ever arrive. The after-tax value of these would be about $5 billion today. 

Yet the two firms have little overlap. Since workers can’t be cut, the initial savings will come from wrangling better prices from suppliers. Most of the benefits further down the road come from selling more goods and best practices, for example, selling Boots’ skincare products in Walgreen stores, and sharing advice on how to run loyalty reward programs. These sorts of gains are easy to talk about and very hard to deliver. 

Of course, Walgreen can choose not to proceed with the second part of the deal should reality not live up to promises. But investors’ skepticism - they sliced nearly $2 billion off its market value on the announcement - is justified.

Advertisement

Read more at Reuters Breakingviews.

Robert Cyran moved from the London office to New York, where he covers global technology, pharmaceuticals and special situations. Rob began his career at Forbes magazine, where he assisted in the start-up of the international version of the magazine.

Quentin Webb is a Reuters Breakingviews columnist, covering mergers and acquisitions, corporate finance and private equity.

TODAY IN SLATE

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Weigel
Sept. 20 2014 11:13 AM -30-
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Behold
Sept. 21 2014 11:00 AM Sometimes You Just Need to Print Your Photos the Old-Fashioned Way 
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 21 2014 8:00 AM An Astronaut’s Guided Video Tour of Earth
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.