Walgreens acquisition by Sycamore Partners leads to S&P negative CreditWatch

Published:2025-03-08 19:32:48
Walgreens acquisition by Sycamore Partners leads to S&P negative CreditWatch

Investing.com -- Walgreens Boots Alliance (NASDAQ:WBA) Inc. has announced a definitive agreement with Sycamore Partners for an acquisition deal worth $23.7 billion, although the financing plans remain undisclosed. As part of the transaction, the company intends to divest its equity interest in VillageMD, a move expected to provide up to $3 per share to shareholders after the sale, totaling approximately $2.5 billion.

The acquisition is expected to be financed through a combination of equity and debt. The company’s new financial sponsor, Sycamore Partners, is expected to increase leverage to maximize its return on equity over a specific holding period. As a result, all ratings of Walgreens, including the ’BB-’ issuer credit rating, have been placed on CreditWatch with negative implications by S&P Global Ratings.

The CreditWatch status will be resolved once Walgreens announces a firm capital structure. The go-forward rating will be assessed based on Walgreens’ capital structure, financial forecast, and business mix. The issuer credit rating could be lowered if the S&P Global Ratings-adjusted debt to EBITDA is expected to remain above 5.5x or if the business appears to be significantly weaker.

On March 7, 2025, S&P Global Ratings took the aforementioned rating actions. A Sycamore-led group plans to acquire all outstanding shares of WBA that it doesn’t already own for $11.45 per share, likely through a mix of equity and debt. The transaction also includes an additional up to $3 per share from the intended divestiture of VillageMD, although a deal for that business remains uncertain.

Previously, VillageMD was seen as an essential source of EBITDA growth and deleveraging. However, if the divestiture of VillageMD goes through, it is likely to weaken future credit metrics.

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Like other private equity sponsors, Sycamore is incentivized to increase leverage to maximize equity returns in a finite holding period. It is expected that Sycamore’s take-private transaction will likely increase S&P Global Ratings-adjusted leverage above the current 5.5x threshold for the ’BB-’ ratings. The company has not yet disclosed whether it intends to redeem or maintain its current debt.

The CreditWatch placement is expected to be resolved once Walgreens announces a firm capital structure. The future rating will be determined based on Walgreens’ capital structure, financial forecast, and business mix. The issuer credit ratings could be lowered if it is expected that the adjusted leverage will remain above 5.5x on a sustained basis or if the business appears to be materially weaker.

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