KKR gets $2bn for partial stake in Alliance

Walgreens has agreed to purchase a 45% stake in the drug store chain for $4bn in cash and $2.7bn in Walgreens’ stock.

Kohlberg Kravis Roberts has capped a busy 24 hours with a partial exit of one of its marquee portfolio companies, drug store Alliance Boots. 

US drug store chain Walgreens will acquire a 45 percent stake in the company in a $6.7 billion deal, in which KKR will receive $1.8 billion in cash and 7 million shares of Walgreens’ common stock valued at around $200 million. 

KKR appears to have made back the bulk of the $2.45 billion it invested in the company in 2007. The remaining $4.7 billion Walgreens has committed to the deal will be distributed in the form of stocks and cash to Stefan Pessina of Alliance Boots, who holds around 33 percent of the company, as well as other shareholders, who hold the remaining 33 percent. 

Upon completion of the deal, which is expected on 1 September and remains subject to regulatory approval, Pessina and Dominic Murphy of KKR will join Walgreens’ board of directors. 

Walgreens has the option to acquire the remaining 55 percent stake during a six month period set to begin two and a half years after the deal closes. The “second step” of the transaction would be valued at around $9.5 billion in cash and stock, in addition to the assumption of Alliance Boots’ debt, according to a statement.

The transaction has already been approved by the boards of both Walgreens and Alliance Boots. The deal excludes a 25.5 percent stake Alliance Boots holds in healthcare company Galencia, according to a statement. 

KKR initially invested $2.45 billion in Alliance Boots in 2007. That initial investment, a partnership with the company’s executive chairman Pessina, included around $1.4 billion from KKR’s 2006 fund, and $750 million from its European Fund II. An additional $300 million was provided from KKR’s balance sheet. 

Since the 2007 investment, Alliance Boots has performed very well compared to similar investments from the era. In its 2011 annual report, KKR attributed its 33 percent net unrealised gains to the increased valuations of Alliance Boots, HCA and US Foods. As of 31 December, the firm’s private equity investment in the drug store was valued at $2.5 billion, according to the annual report. 

As of 30 September, the 2006 fund was generating a 1.1x investment multiple and a 2.8 percent net internal rate of return, according to California Public Employees’ Retirement System documents. The returns for European Fund II, a 2005 vintage, have been much more tepid. That vehicle was generating a negative 3.1 percent net IRR and a 0.9x multiple as of September, according to CalPERS.

It is unclear how much KKR will distribute to its limited partners through the deal. The firm did not respond to a request for comment. 

On Monday, KKR announced that it had agreed to acquire Prisma Capital Partners for an undisclosed amount. The acquisition would expand the firm’s public assets under management by around $8 billion, according to a source. 

The firm also announced the appointment of Henrique Meirelles as a senior advisor. Meirelles, a former chief of Brazil’s central bank, will assist the firm’s expansion into the Brazilian market, the firm said.