Why Walgreens Could Be Valued At $71/Share In A Leveraged Buyout

Mizuho raised the potential takeout range in a possible leveraged buyout for Walgreens Boots Alliance Inc WBA to as high as $71 a share, but said something closer to $67 is more likely.

The Analyst

Mizuho analyst Ann Hynes raised the potential takeout range to $64-$71 per share, up from an initial analysis projecting $60-$67 per share. Hynes has a Neutral rating on Walgreens with a $59 price target.

Hynes said there is a "willing debt market for a deal like WBA at an appropriate pro forma leverage." She said the most likely scenario analysis yields an internal rate of return of 23% for whomever might sponsor the LBO, if it happens.

Background

Bloomberg reported recently KKR & Co Inc KKR has approached Walgreens with a possible proposal for a take-private deal for the pharmacy chain that could be the biggest leveraged buyout in history. That followed a Reuters report that Walgreens was looking for possible private equity partners to take the company private.

Analysts have said the deal would require at least $50 billion of debt to fund it.

That's out there, Hynes said.

"Based on conversations with our fixed income counterparties at Mizuho Securities, we believe there is a willing debt market for a deal like WBA," Hynes wrote in a note. "Given the size of the potential deal (roughly $70 billion), we suspect there would need to be more than one private equity player involved and management participation," noting current CEO Stefano Pessina owns about 16% of the outstanding Walgreens shares.

The Numbers

Hnes said a realistic pro forma leverage on such a big deal would be six times. With an equity investment of 37%, that yields a take-out share price of $67. Increasing the share of the debt that is from equity to 40% and keeping the six times pro forma leverage, you get to $71, Hynes said.

Mizuho believes, however, "the $67 range is more reasonable."

Deerfield, Illinois-based Walgreens, which operates Walgreens and Duane Reed pharmacies in the United States, and Boots in Great Britain, has a market capitalization of more than $56 billion and holds more than $16 billion in debt.