Walgreens' Sefano Passina's $70bn global ambition
By Andrea Felsted - Nov 11th, 10:07
Any deal would be impossible without the backing of the Italian billionaire who owns 16% of the group and has China in his sights.
combined group private — with KKR — in a $16bn deal, Europe’s biggest buyout at the time.
Acquiring Walgreens would dwarf Alliance Boots. It would probably need several financial sponsors and substantial debt funding. Walgreen’s leverage is already fairly high. Net debt will be about 1.8 times earnings before interest, taxes, depreciation, and amortisation (ebitda) at the end of the current financial year, according to Bloomberg analyst estimates.
The retail business generates cash. Even so, this might not be the best time to gear up. The Alliance Boots buyout saddled the group with about $12bn of debt, just as the global economy was hit by the financial crisis. With concerns about a US recession escalating, there’s a risk of history repeating itself.
What’s more, the retail landscape has shifted dramatically over the past decade. Amazon is a much more muscular force than it was in 2007 and seems to be targeting the pharmaceutical business. Meanwhile, Walgreens faces other rivals such as Ulta Beauty in the US and AS Watson Group, which owns Britain’s Superdrug.
To keep up, the privately-owned company would need to invest, as well as service its debt.
Walgreens also has a huge number of stores, which may need to be pruned. While it might be easier to close shops away from the glare of the public markets, terminating leases is expensive.
Pessina — and, more importantly, any private equity backers — will need an exit eventually should the buyout succeed. Last time he was able to persuade Walgreens to purchase Alliance Boots. There’s no such obvious contender now. The group could re-list on the public market, but potential holders would have to be convinced that the investment case was different this time around.
After conquering the US, Pessina has long had China in his sights and has already made several investments there. It’s possible that he wants to tie up with an Asian operator to create his ultimate goal: a truly global pharmaceutical distribution and retail group. Given the trade tensions between the US and China that might not be so easy right now. But things might look better after five years — a typical private equity holding period.
At 78, some other executives are heading for the beach, but Pessina has shown no signs of slowing down. In fact, another mega-buyout may just be the next step in his global ambitions.
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