Moody's Places Walgreens Boots Alliance (WBA) Ratings on Review for Downgrade (RAD)

October 28, 2015 11:17 AM EDT

Moody's Investors Service today placed the ratings of Walgreens Boots Alliance, Inc. ("WBA") (Nasdaq: WBA) and its wholly owned subsidiary Walgreen Co. on review for downgrade. The review for downgrade is prompted by WBA's and Rite Aid's announcement that WBA would be acquiring Rite Aid for $9 per share plus its existing debt in a transaction valued at about $17.2 billion. Moody's estimates that this represents over a 13x EBITDA multiple and about a 48% premium over Rite Aid's closing share price on October 26, 2015. The transaction is expected to close during the second half of calendar 2016.

The following ratings are placed on review for downgrade:

For Walgreen Boots Alliance, Inc.

Senior unsecured notes at Baa2

Backed Commercial Paper rating at Prime-2

Senior unsecured Shelf at (P)Baa2

For Walgreen Co.

Senior unsecured notes at Baa2

Backed Commercial Paper rating at Prime-2


The merger will solidify WBA's position as the US's largest retail drugstore chain and will provide WBA with the ability to achieve significant synergies. However, WGA's debt levels will signficantly increase as a result of the transaction. The review for downgrade is based upon the expected sizable increase in WBA's debt levels as the transaction is expected to be heavily financed with debt and there will be no equity component to the transaction. The review for downgrade also acknowledges the short time frame that has passed since Walgreen's acquisition of Alliance Boots in December 2014. "Given how quickly WBA is making another acquisition, we view its financial policy as being more aggressive than currently contemplated in its Baa2 rating," stated Maggie Taylor, a Senior Vice President with Moody's.

Moody's rating review of WBA will consider the level of store closures required by the FTC in order for the acquisition to be approved, the level of any potential synergies, and the integration risks associated with layering on an additional acquisition so close to the closing of the combination of Walgreen with Alliance Boots and Rite Aid with Envision. The review will also focus on how the acquisition will be financed and the likely pace of deleveraging post-closing. It will consider how much of Rite Aid's existing debt will remain in place and any support (including guarantees) that will be provided to Rite Aid's debt. Moody's expects that the review will likely extend longer than 90 days given the FTC approval process and WBA's already strong position of being the US's largest drug store chain.

Moody's anticipates that WBA's senior unsecured rating would likely be downgraded to Baa3 and Commercial Paper rating would be downgraded to Prime-3 upon conclusion of the review.

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