Walgreens Boots Alliance Set to Go Private in $10 Billion Sycamore Partners Deal
After nearly a century as a publicly traded company, Walgreens Boots Alliance (WBA), a U.S. pharmacy giant, is poised to transition into private ownership under a $10 billion acquisition agreement with Sycamore Partners, a private equity firm specializing in retail and consumer investments. The deal marks a significant turning point for Walgreens, reflecting a challenging period of declining market value and strategic missteps.
Sycamore Partners will pay $11.45 per share for Walgreens, representing an 8% premium over the stock’s closing price of $10.60 on Thursday. The announcement triggered a nearly 6% surge in the company’s shares during extended trading, indicating investor sentiment that the deal offers reasonable value given the current circumstances. Furthermore, Walgreens shareholders have the potential to receive an additional $3 per share in cash contingent on the future monetization of the company’s debt and equity interests in VillageMD, a primary care provider.
The proposed acquisition underscores the stark decline in Walgreens’ market capitalization. A decade ago, the company boasted a market value of nearly $100 billion, a figure that has since dwindled to just over $9 billion. This dramatic erosion is attributed to a confluence of factors, including declining margins on drug prices, a shift in consumer preferences towards cheaper alternatives like Amazon and Walmart for prescriptions and toiletries, and strategic missteps in diversification.
While competitors like CVS diversified their businesses into areas such as insurance and prescription management, Walgreens doubled down on expanding its pharmacy chain footprint, acquiring other pharmacy chains despite the growing trend away from traditional brick-and-mortar retail. These strategic choices, particularly under the leadership of former CEO Stefano Pessina, have resulted in a significant accumulation of debt and lease obligations, now totaling almost $30 billion.
"You have a business that is shrinking, and then you layer on losses and cash burn; all of that was the perfect recipe for what we are seeing today," noted Brian Tanquilut, a healthcare services research analyst with Jefferies bank, highlighting the unsustainable trajectory that led to the acquisition.
Sycamore Partners’ acquisition strategy typically involves acquiring distressed retailers, streamlining operations, and extracting value through various measures. The firm has a history of acquiring brands such as Staples, Talbots, and Nine West, and its approach often includes selling off valuable assets and implementing cost-cutting measures, such as store closures. The resulting savings are frequently channeled towards dividend payouts rather than reinvesting in growth initiatives.
Ann Hynes, an analyst with Mizuho Bank, believes that taking Walgreens private "makes sense on paper," arguing that the company’s operational challenges are likely to be better addressed without the constant pressure of shareholder expectations and public market scrutiny.
Walgreens is currently grappling with reduced cash flow and faces the burden of repaying over half of its $7 billion in net debt next year. In response, the company has initiated a $1 billion cost-cutting program under the leadership of CEO Tim Wentworth and is actively closing thousands of stores in an effort to improve its financial standing.
The company’s current footprint includes 312,000 employees in 12,000 stores across eight countries, representing a significant reduction from its position four years ago when it operated in 25 countries with 450,000 employees and 21,000 stores.
Many of the company’s strategic missteps are attributed to the tenure of former CEO Stefano Pessina, who also serves as the company’s largest single shareholder. During Pessina’s leadership from 2007 to 2014, Walgreens’ market capitalization shrank to less than $50 billion.
In 2012, Walgreens made a $5.2 billion investment in primary-care provider VillageMD, a venture that has proven to be a drain on the company’s resources. Analysts believe that VillageMD is now a likely candidate for divestiture under Sycamore’s ownership.
Two years later, Walgreens completed a two-step acquisition of Swiss-based Alliance Boots, a pharmacy-led health and beauty group. This acquisition is now viewed by analysts as a potential spin-off opportunity.
Despite the evolving market landscape and the challenges facing the retail pharmacy sector, Walgreens continued its acquisition spree, acquiring nearly 2,000 stores from its former rival Rite Aid Corp in 2018. However, the expanded store footprint proved to be unsustainable, leading to subsequent store closures.
In contrast to Walgreens’ strategic decisions, its top competitor, CVS, diversified its business beyond retail, notably acquiring U.S. health insurer Aetna for nearly $70 billion in 2018. Walgreens, on the other hand, opted against acquiring insurer Humana, missing an opportunity to diversify into the lucrative insurance market.
The acquisition by Sycamore Partners signifies a new chapter for Walgreens, marked by a shift from public to private ownership and a renewed focus on addressing the company’s operational challenges and financial constraints. The success of the acquisition will depend on Sycamore’s ability to effectively streamline operations, unlock value from the company’s assets, and adapt to the evolving dynamics of the retail pharmacy market. The transition to private ownership also raises questions about the future of Walgreens’ employees, store footprint, and overall strategy in the face of increasing competition and changing consumer preferences. The coming years will undoubtedly be pivotal in determining whether Walgreens can revitalize its business and regain its position as a leading player in the pharmacy industry.
