The Boots Group has issued $2bn in secured bonds as part of a financing deal in one of this year’s largest private equity debt transactions.
The UK pharmacy and cosmetics chain, owned by US parent company Walgreens Boots Alliance NASDAQ:WBA, is being bought by the seasoned US private equity firm Sycamore Partners in a $23.7 billion buyout deal which will spin off The Boots Group into an independent company.
The secured notes are denominated in sterling, euros and dollars, with the sterling notes carrying a 7.375% coupon. Net post transaction is set to be 3.1 times adjusted EBITDA.
Boots is a well-established business with sustainable competitive advantages. Pharmacy drives footfall to a nationwide network of around 2,300 Boots stores, including 373 opticians, across the UK and the Republic of Ireland. Boots has leading positions across its key product categories of beauty and health and wellness, benefiting from the cost efficiencies of the closures of department stores. It has improved its position despite new store openings by competitors in the premium beauty sector.
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Fitch Ratings has assigned The Boots Group’s notes a BB rating, one-notch above the group’s overall BB- rating and with a stable outlook, noting a moderately high 5.0 times opening EBITDAR leverage is mitigated by the expectation of sustained positive free cash flow generation. This rating assumes a proposed capital structure with $4.25bn in debt and $2.83bn in equity, which will be used to fund the $6.4 billion implied purchase price and transaction costs and leave about $500 million of cash on balance sheet.
Boots’ strong financial position
While the Boots Group is a very established name in the UK and Ireland, with brand recognition of around 99%, what is less well known is that the company also consists of Alliance Healthcare Germany, a similarly well-known pharmacy wholesaler in Germany, and Farmacias Benavidas, the third largest pharmacy retailer in Mexico.
The UK and Ireland segment of the group consisting of Boots UK, Boots Republic of Ireland and Boots Opticians, has during the last year brought in $10.7bn in sales, or 43% of The Boots Group total, generating adjusted EBITDA of $1.05bn, or 89% of the group total EBITDA and an EBITDA margin of 10%.
Alliance Healthcare Germany, with its more than 11,000 retail pharmacy customers, generated $13bn in sales with an adjusted EBITDA of $45m and an EBITDA margin of 0.8%.
Of the three main Boots Group components, Farmacias Benevidas is the junior partner in terms of sales, which came in at $0.9bn and an adjusted EBITDA of 5%. While there are no immediate plans to sell off Benevidas, the Mexican operations of The Boots Group could eventually end up being divested, as there is almost no logistical overlap with the UK and European operations.
Market sentiment on high-yield bonds has improved in both Europe and the US over the last few weeks.
The Boots issuance is part of a series of large-scale financing deals this year on both sides of the Atlantic and follows on from a EUR 2.8bn bond offer by Flutter Entertainment for the acquisition of Playtech’s Italian subsidiary and a $2bn debt package initiated by Silver Lake to finance an investment into chipmaker Altera. Market sentiment on high-yield issuances has improved in recent weeks, indicating growing risk appetite.
The latest Boots bonds and other corporate notes are available on the WiseAlpha platform.
