Sycamore Partners will take Walgreens Boots Alliance private in a $10 Billion deal. The companies announced the news on Thursday. This marks the end of almost a century for Walgreens Boots Alliance as a public company.
After years of turmoil, Walgreens market value has plummeted from $100 billion at its peak to $9.3billion.
Sycamore is paying $11.45 for each share. This represents an 8 percent premium to Walgreens closing price on Thursday of $10.60.
Shareholders could also receive as much as $3 in cash per share from the future monetization Walgreens stake in VillageMD, a primary care provider.
According to the investment bank Leerink Partners, the total value of this transaction includes debts and payouts.
Amazon and Walmart are eating into Walgreens share
Walgreens is losing market share to Walmart and Amazon, who are gaining ground on Walgreens.
Walgreens, while its rivals focused on insurance and medication management, pursued a strategy of aggressive expansion, spending billions to acquire other pharmacies, such as the European giant Alliance Boots.
The company was exposed to shrinking margins and declining foot traffic due to the move away from brick-and mortar retail.
Market capitalization of the company has dropped by 90 percent since 2015. Its debt has increased to almost $30 billion.
Walgreens has reported an $8.6 billion net loss for fiscal 2024, almost three times that of the prior year.
Analysts say that while the company has recently exceeded earnings and revenue targets in its latest quarter, the turn-around remains a challenge.
In a Reuters article, Brian Tanquilut said, “The perfect formula for today’s situation is a shrinking business, followed by losses and cash burning.”
Leadership mistakes compounded problems
Walgreens spent many years looking for potential buyers of parts of their business.
KKR, a private equity company in 2019, reportedly made an offer of $70 billion for the takeover. However, the negotiations did not progress.
Sycamore has acquired the company for a fraction that price.
Former CEO Stefano Pessina was the company’s largest shareholder. He also made strategic mistakes.
Walgreens market capitalization fell by almost half during his tenure. Its expansion strategy also failed to produce long-term benefits.
Sycamore is now considering divesting from VillageMD after a $5.2 billion investment.
CVS has also successfully expanded its retail business, buying Aetna, the health insurance company, for $70 billion.
Walgreens considered purchasing insurer Humana, but eventually abandoned the idea. Analysts now view this as a lost opportunity.
Sycamore’s Turnaround Strategy
Sycamore is a private equity company that has acquired struggling retail brands. They have a long history of creating value by implementing cost-cutting, closing stores, and selling assets.
The company has acquired Staples and Talbots in the past, as well as Nine West. They have often restructured their business to increase profitability.
Analysts predict that Sycamore will follow the same playbook as Walgreens. They expect Sycamore may sell off its non-core assets, such as Boots (its UK-based chain of pharmacies), and reduce operational costs throughout its retail footprint.
Ann Hynes of Mizuho Bank said that going private made sense “on paper.” She added that Walgreens would be better able to handle its operational challenges without having to commit itself in any way.
Structure of the deal and possible roadblocks
Walgreens can solicit bids for the transaction during a “go-shop period” of 35 days.
Analysts believe that a rival offer would be unlikely due to the complex nature of the transaction.
Michael Cherny is an analyst with Leerink Partners. He said that given the number of factors involved, including a possible split between the US, Boots and Health businesses, a rival bid was unlikely.
The future of Walgreens’ global operation remains in doubt, as the company prepares to be privatized.
The takeover of Sycamore by a private equity firm offers an opportunity to restructure, but questions still remain as to whether or not the company’s long-term strategy is going be able lead it towards growth.
Investors will closely monitor the steps taken by one of America’s oldest pharmacy chains as it transitions into a private ownership.
The post Walgreens goes private in $10B Sycamore deal: How the pharmacy giant fell out of grace might be updated as new developments unfold.
