Walgreens to be taken private by Sycamore Partners in $10B deal

Walgreens Boots Alliance will be taken private by Sycamore Partners for $10 billion, the buyout firm said on Thursday, closing out nearly a century of trading on public markets for the US pharmacy giant.

Sycamore will pay $11.45 per share, a premium of 8% to the stock’s closing price of $10.60 on Thursday. Shares of the company rose nearly 6% in extended trading.

Walgreens shareholders could also receive an additional $3 in cash from future monetization of the company’s debt and equity interests in VillageMD.

The company’s market value has shrunk to just more than $9 billion from almost $100 billion a decade ago as margins on drug prices fell and consumers shifted to cheaper rivals Amazon and Walmart to fill their prescriptions and purchase toiletries.

And when rivals diversified into insurance or prescription management, Walgreens invested billions buying other pharmacy chains despite the trend away from in-store shopping.

As a result, the second-largest US pharmacy chain’s debt and lease obligations have ballooned to 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,” said Brian Tanquilut, a healthcare services research analyst with Jefferies bank.

Sycamore Partners, a private equity firm that specializes in retail and consumer investments, has a track record of acquiring distressed retailers for profit: among them were brands such as Staples, Talbots and Nine West.

Its past approach has involved selling the companies’ most valuable assets, and reducing costs in the remaining operations through store closures and other measures, with savings often used to draw dividends and not necessarily aimed at growth.

“Going private makes sense on paper,” said Ann Hynes, an analyst with Mizuho Bank, adding that Walgreens’ operational challenges would likely better be handled without commitments to shareholders.

Downfall

Walgreens has been suffering from reduced cash flow and more than half of its $7 billion in net debt is due next year.

The company is closing thousands of stores and has embarked on a $1 billion cost-cutting program under CEO Tim Wentworth, with some success.

It currently employs 312,000 people in 12,000 stores in eight countries, according to its website, a sharp decline from the 25 countries, 450,000 employees and 21,000 stores it had four years ago.

Many of the company’s missteps were under former CEO Stefano Pessina, also its largest single shareholder, whose 2007-2014 tenure at the helm saw Walgreens’ market capitalization shrink to less than $50 billion.

In 2012, Walgreens announced a $5.2 billion investment in primary-care provider VillageMD. That proved to be a cash drain and is now a good exit candidate for Sycamore.

Two years later, Walgreens concluded a two-step acquisition of Swiss-based Alliance Boots, a pharmacy-led health and beauty group that is now considered by analysts as a likely candidate for a spin-off.

The company stuck to its buying spree even after Pessina, snapping up almost 2,000 stores from its former rival Rite Aid Corp. in 2018. But that store footprint proved too big and soon after the acquisition, Walgreens started to close locations.

There were also missed opportunities. While its top rival CVS has diversified its business beyond retail, including acquiring health insurer Aetna for almost $70 billion in 2018, Walgreens turned away from buying insurer Humana.