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Alliance Boots Reverses Debt Binge to Expand: Corporate Finance

June 17, 2013

Alliance Boots GmbH, the pharmacy company that loaded up on debt in a 11.1 billion pound ($17.4 billion) leveraged buyout before the credit crisis, is now seeking success by cutting borrowing as it expands globally.

Six years after KKR & Co. and Italian billionaire Stefano Pessina increased the company’s debt by more than eight times as part of Europe’s biggest buyout at the time, Alliance Boots is planning to buy back the 397 million pounds of its outstanding subordinated obligations due 2017, saving more than 100 million pounds in future interest payments. Net debt has declined 33 percent to 5.9 billion pounds since 2008, according to company statements.

The shift will help the owner of the U.K.’s largest drugstore chain to plough more cash into acquisitions after Deerfield, Illinois-based Walgreen Co. (WAG:US) took a 45 percent stake last year and helped it to grow globally. Alliance Boots generated more than 61 percent of its 22.4 billion-pound sales from outside the U.K. in the year ended March, up from 51 percent five years ago, according to its earnings reports.

“With the tie-up with Walgreen that brings the U.S. platform, you can see Boots’s footprint is becoming more and more global, and continued deleveraging will give them the flexibility to deploy cash flows to new markets rather than pay interest,” said John Foy, the London-based head of leveraged finance at Prudential Plc (PRU)’s M&G Investments, which manages more than 228 billion pounds globally.

Asia Growth

Asia, and particularly China, alongside larger markets in Latin America are priorities for Alliance Boots’ international acquisitions, London-based Finance Director George Fairweather said in a telephone interview on June 13. There are also “fill-in opportunities” in Europe and existing markets, though there are “relatively few,” he added.

Alliance Boots bought a 12 percent stake last year in China’s Nanjing Pharmaceutical Co., the country’s fifth-biggest drug wholesaler. It has had a joint venture since 2008 with Guangzhou Pharmaceuticals Corp. (874), the fourth-largest drug wholesaler in China, with annual revenue of 2 billion pounds.

Investment Grade

Alliance Boots plans to continue reducing its net borrowings while increasing acquisitions as it builds profits and generates cash, according to Fairweather. The company, which isn’t currently rated by Moody’s Investors Service, Standard & Poor’s or Fitch Ratings, is aiming for an investment-grade credit profile while maintaining some borrowings, he said.

Alliance Boots’ net debt was about 3.6 times its 1.65 billion-pound of cash generated from operations at the end of March, down from 7.6 times five years ago, according to its annual reports.

Leverage will need to come decline for the company to warrant a high-grade rating, Britta Holt, a London-based Fitch analyst said in a telephone interview.

The cost of insuring Alliance Boots’ debt from losses using credit-default swaps has fallen to 110 basis points from 134 basis points at the beginning of the year, according to data compiled by Bloomberg. The extra yield investors demand over Treasuries to buy Walgreen’s $1.2 billion 3.1 percent bonds maturing in September 2022 has dropped to 120 basis points from 126 basis points in the same period, Bloomberg data show.

KKR, Pessina

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13 million) of debt from default for five years is equivalent to 1,000 euros a year.

Starting with a family drug business, Pessina became chairman of drug wholesaler Alliance Unichem Plc, which merged with the Boots retail chain and its network of more than 3,000 stores in 2006. KKR and Pessina bought Alliance Boots in 2007, valuing the share capital at about 11.1 billion pounds at the top of the buyout boom, the biggest private-equity deal in Europe’s history at the time.

Arrangers of the Alliance Boots buyout loans struggled to find investors for the debt in 2007, according to people familiar with the sales at the time, as a global credit crunch brought leveraged buyouts to a standstill and left loan underwriters with unsold deals.

Walgreen Stake

Walgreen, which acquired its 45 percent stake in Alliance Boots in August 2012 for $6.7 billion, has the option to buy the rest of the drugstore chain in about three years for $9.5 billion plus assuming outstanding debt, according to a statement in June 2012.

“The deal with Walgreen is a real game changer,” said Alex Moss, a London-based senior credit analyst at Insight Investment Management. “Investors no longer buy Boots debt simply because it’s Boots, they are just as much looking at Walgreen.”

S&P rates Walgreen at BBB, its second-lowest investment grade ranking, while Moody’s grades it the equivalent of one level higher at Baa1.

Alliance Boots’ debt has fallen to 5.9 billion pounds this year from 8.7 billion pounds at the end of March 2008 while earnings before interest, tax, depreciation and amortization rose to 1.5 billion pounds from 1 billion pounds, according to its annual reports. Total cash flow has increased about seven times to 1.1 billion pounds since the end of March 2009, the statements show.

Loan Buyback

The company is offering lenders 100.5 percent of face value until the end of June for its subordinated debt and it will pay 100 percent after that date, people familiar with the deal said earlier this month. Alliance Boots estimated future interest payment and fee amortization of 143 million pounds for the junior loans at the end March, according to its annual report. The loans are quoted at 100.5 percent on June 13, up from 99.85 percent at the beginning of the year, according to Markit Group Ltd.

Lenders representing more than 80 percent of 5.1 billion pounds of loan facilities agreed to lengthen their maturity by two to three years last year, the company said in an e-mailed statement in December.

Alliance Boots’ second-lien term loan D2, due in December 2018, was quoted at 100.6 percent of face value on June 12, up from 99.9 percent in January. The company’s B5 debt fell to 99.6 percent from 100 percent in the same period, according to prices provided by Markit.

“It’s hard to see Boots returning to add debt,” said M&G’s Foy. “The transformation of Boots comes down to immaculate execution of very clever and well thought-out financial and growth strategies.”

To contact the reporters on this story: Patricia Kuo in London at; Sarah Shannon in London at

To contact the editors responsible for this story: Faris Khan at; Celeste Perri at

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