FINANCE Bloomberg Businessweek November 25, 201925PHOTO
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THEBOTTOMLINE A dealtobuyWalgreensandtakeit private
couldcostmorethan$70billion—alargepillforevenKKR
toswallow.○ AnAustralianretirementsaversueshis
moneymanageroverclimatechangeriskHowGreen
IsMyPension?
Mark McVeigh, a 24-year-old environmental
scientistfromAustralia,won’tbeabletoaccess
hisretirementsavingsuntil2055.But,concerned
aboutwhattheworldmaylooklikethen,he’s
takingactionnow,suinghisA$57billion($39bil-
lion)pensionfundfornotadequatelydisclos-
ingorassessingtheimpactofclimatechangeon
itsinvestments.
ThebattleinAustralia’sFederalCourtis shap-
inguptobea uniquetestcase.Arepensionfunds
inbreachoftheirfiduciaryduties—therequire-
menttolookoutforthebestinterestsoftheir
investors—iftheyfailtoprotecttheirportfolios
fromthefinancialravagesofa warmerplanet?
Althoughthelegaldisputeis specifictoAustralia,
thequestionis onesaversandmoneymanagers
aroundtheworldaregrapplingwith.
Beforelaunchingtheaction,McVeighasked
the fund he invests with, Retail Employees
SuperannuationTrust,orRest,howit wasensur-
inghissavingswerefuture-proofedagainstrising
worldtemperatures.Itsresponsedidn’tsatisfy
him,andheendedupengagingEquityGeneration
Lawyers,a firmspecializinginclimatechange.
“Iseeclimatechangeasa hugeriskthatdwarfsa
lotofotherthings—it’ssucha bigphysicalimpactforced to do a smaller store-purchase deal instead.
Its shares had fallen about 30% from their 52-week
high in December 2018 before Bloomberg News
reported on the potential buyout on Nov. 5. “The
retail pharmacy market is on the verge of an intense
shakeout,” says Adam Fein, CEO of Drug Channels
Institute, which researches the economics of phar-
maceuticals. Over the next decade or so, the number
of retail drugstore locations could decline by 10,000
or more, he says.
Depending on the price, going private could give
shareholders a chance to sell at a premium. It may
also give Walgreens time to make changes to adapt
to the quickly shifting consumer landscape outside
of the quarter-by-quarter demands of public share-
holders. These changes could be painful for some.
If a deal gets done, expect “significant layoffs and
significant store closings” to improve the business,
says John Coffee, director of the Center on Corporate
Governance at Columbia Law School. In buyouts,
he says, “the essential goal is to take the company
into the machine shop for very substantial repair-
ing and remodeling.” Because private equity deals
are typically funded with debt taken on by the tar-
get company, a post-buyout Walgreens could still be
under pressure.
For KKR the logic of a buyout is less straight-
forward, despite Walgreens’ decent cash flow. Start
with the sheer size of the transaction, which analysts
say could require at least $50 billion in debt financ-
ing and possibly more than $20 billion in equity. “It’s
a huge stretch doing things over $50 billion,” said
Stephen Schwarzman, head of KKR rival Blackstone
Group Inc., at a Reuters event in New York. Most of
the money would have to come from debt markets,
where banks have struggled in recent months to find
buyers for riskier buyout loans.
Most buyouts are funded with junk-grade debt.
But to do a deal large enough to snag Walgreens,
it’s likely some of the debt would be put together
in a way that would earn it a better credit rating.
“If you created an investment-grade tranche, you
clearly increase the feasibility of the deal,” says Mark
Vaselkiv, chief investment officer of fixed income at
T. Rowe Price. “There would be a lot of demand.” A
buyout investor might join with another firm or pen-
sion fund to raise equity.
Buyers could also split up U.S. and U.K.
operations—the same ones put together in
earlier deals—and sell the retailer’s stake in
AmerisourceBergen Corp. Analysts say Walgreens’
holdings in the drug distributor could fetch more
than $4.5 billion.
Still, the skeptics have been loud. “We believe the
basic unattractive math of the transaction, not tomention the unattractive nature of the standalone
pharmacy business, are high hurdles,” Deutsche
Bank analysts wrote in a client note.
The main problem for Walgreens—the exter-
nal threats facing the whole industry—isn’t some-
thing private equity can easily solve. The company
is already cutting costs aggressively. So why is a
deal under discussion? There’s a lot of investor
cash—“dry powder” in private equity jargon—wait-
ing to be put to work, which means even a complex
transaction may be worth a look. As for Walgreens,
the deal talk highlights the tough situation it’s in.
—Nabila Ahmed, Robert Langreth, and Lisa Lee○ Walgreens Boots
Alliance stores,
worldwide*
18k90
2009 2019