The Prospective $70 Billion Buyouts of Walgreens Might Signal the Stock-Market Rally About to End

If traders ever wanted a clear sign that that is the highest of the market, they now have one.

Walgreens Boots Alliance shares surged Wednesday amid hypothesis that the U.S.-listed drugstore group has been contemplating a $70 billion take-non-public deal.

If personal fairness can pull it off, it will be the most important leveraged buyout ever, dwarfing the $45 billion transactions wherein energy group TXU was taken non-public in 2007, only a year before the financial disaster rocked world markets and prompted unprecedented intervention by world central banks.

Financing a buyout deal on the dimensions of a Walgreens deal at present might be a big problem.

For one, Walgreens WBA, -1.38% already has $15 billion in debt on its stability sheet. A possible bidder would wish so as to add extra leverage to fund the purchase. That would depart the pharmacy chain significantly weak when the credit score cycle turns — which is wanting more and more probably.

The volume of leveraged loans has reached $3.4 trillion worldwide, based on estimates from the Bank of England. Credit high quality has deteriorated, with most new leveraged loans being issued by companies that have excessive levels of debt as in contrast with their earnings.

Banks are already struggling as investors avoid hefty private-equity debt packages.

The debt-fuelled buyout of TXU additionally took place in an overheated private-equity market.

When KKR and TPG purchased the Texas utility, they had been betting that natural-gas costs would rise. However, the two buyout corporations didn’t anticipate the economic crisis that would reduce power demand and the technological revolution around shale that depressed the costs paid for electrical energy.

As the value of natural gas falls sharply, the buyout groups struggled to service the massive debt load taken on to finance the purchases, and the utility eventually filed for bankruptcy.