Is anyone surprised that Walgreens is looking to sell itself — reportedly to private equity firm Sycamore Partners?
Walgreens has been losing a lot of greenbacks lately: a whopping $8.6 billion of them in fiscal 2024. Its foray into primary care has been a challenge forcing it to close a series of VillageMD clinics nationwide. Even its pharmacy business has faced competition from nimble, online pharmacy retailers like Amazon Pharmacy and Mark Cuban’s Cost Plus Drugs and fallen casualty to drug prices being negotiated.
And investors have paid attention to its missteps. Over the past five years, the stock price of the retail giant, if we can even use that term anymore, has floundered — it is currently trading at less than $10 down from a high of nearly $40 at the end of 2019.
So, when the Wall Street Journal reported last week that Deerfield, Illinois-based Walgreens is exploring a sale, the struggling retailer’s shares jumped by about 17% that day.
If a deal were to take place, there could be a potential buyout of about $9.2 billion to $10 billion, wrote Erin Wright, an equity analyst with Morgan Stanley, in a research note following the WSJ report. It’s slim pickings given that the global investment firm KKR made a $70 billion offer to buy Walgreens in 2019, according to the Financial Times. A report from Pitchbook showed that the deal reportedly stalled because KKR and its prospective financiers couldn’t agree on Walgreens’ valuation.
Given its diminished status, is selling to a private equity buyer a good move for Walgreens?
The answer appears to be “yes” for some experts.
“At this point, some fresh thinking is needed to reconceptualize how the company’s assets can be more fruitfully employed,” said Michael Abrams, managing partner of Numerof & Associates, a consulting firm.
Walgreens and Sycamore Partners declined to comment.
Why Walgreens May Want to Sell Itself
The rumors about Walgreens considering a sale come after nearly a decade of efforts to restore growth, according to Abrams. During that time, its market value fell from over $100 billion to below $8 billion, he said.
He added that the company has attempted numerous strategies to turn things around, including expanding into Europe with its acquisition of Alliance Boots and buying a stake in primary care provider VillageMD for about $5.2 billion.
“The fact of the matter is that the pharmacy business is a mature one with flat margins in the core function of dispensing prescription drugs,” Abrams said. “Add to that growing pressure from pharmacy benefit managers who negotiate drug prices on behalf of insurers and employers, and Walgreens’ extraordinary network of over 12,000 stores is less an asset than a liability.”
He added that sales for retail products have faced increased competition from Amazon and other e-commerce sites.
The hope is that selling to a private equity firm could help Walgreens make operational improvements and grow, according to Keith Campbell, the leader of West Monroe’s merger & acquisition practice. West Monroe is a consulting firm.
“By closing underperforming locations and leveraging sale-and-leaseback transactions, Walgreens could reduce debt and streamline operations,” Campbell said. “Once the retail business is stabilized and cash flow positive, the focus could shift to high-growth segments like home care and rare/orphan drug compounding.”
But why Sycamore Partners? After all, the company doesn’t have much experience in healthcare. It has historically done smaller deals than Walgreens and would probably have to sell off parts of its business or bring in partners to get the deal through, Abrams pointed out.
The key attraction could be that the New York-based firm specializes in retail and consumer investments. Abrams stated that its portfolio includes office supply store Staples and clothing stores Hot Topic, Ann Taylor and Chico’s.
The fact that Sycamore Partners is more retail-oriented and consumer-focused is interesting to Hal Andrews, president and CEO of Trilliant Health. He noted that the beauty business at Boots stores in London is just as prominent as the pharmacy business, if not more.
“Boots, from just an experience standpoint, is much more of a consumer business around health and wellness and beauty. … But healthcare is a very different thing,” he said. “The fact that Sycamore is interested suggests that they see an opportunity to really focus on the retail side, the consumer side, the health and beauty part of the business, and not so much on the healthcare side, whether that’s VillageMD or Shields or anything else that’s really hands-on medicine as opposed to retail health.”
Is this the right move?
At this point, selling to a private equity buyer like Sycamore Partners may be the right call for Walgreens, Abrams said.
“Walgreens missed the opportunity to diversify into the PBM or insurance space years ago, and so has been at the mercy of others like CVS who did,” he declared. “Their effort to enter the primary care space made sense, but the company underestimated the cost and effort involved in changing the public’s expectations to see the local drug store as a care provider.”
Another consultant echoed Abrams’ comments, noting that the faltering retail giant needs to make a strategic change in order to avoid “further decline.”
“I think right now a private equity owner could potentially drive the needed changes, such as a greater focus on e-commerce, rethinking the retail footprint, and pursuing M&A to expand into adjacent healthcare services,” said Howard Gutman, private equity strategy and coverage lead for MorganFranklin Consulting. “However, successfully executing this transformation would require Walgreens to develop new capabilities around digital operations, M&A integration, and managing a more diversified business model. This is another reason I think the move towards finding the right private equity partner makes sense.”
Andrews of Trilliant Health stated that he can’t say for sure whether this is the right move for Walgreens. As an executive, however, he did note that when a company needs to restructure a business, it’s much easier to do that when you’re privately held and not reporting to Wall Street every 90 days.
“It allows the management team to just focus on the objectives and not worry about what Wall Street’s gonna say every 90 days and whether the stock is gonna go up or down,” he said. “It allows for clarity, and clarity allows for more focus on executing the plan, as opposed to worrying about what people think about it.”
Although a private equity deal seems like the smart decision for Walgreens to some, Wright of Morgan Stanley doesn’t seem to think the deal will go through.
“While we acknowledge the context around a potential sale in a challenging pharmacy backdrop, a buyout is harder to contemplate given its already sizable debt burden and paltry cash flow, making the value creation pathway harder to decipher,” Wright stated in the analyst note.
Andrews added that Sycamore Partners may not be the only interested party in Walgreens and there could very well be additional potential buyers down the road with competing offers.
“This is really just step one, and it’ll be interesting to see whether another private equity firm steps in,” he said.
Photo: alexsl, Getty Images
