Is anyone surprised that Walgreens is actively exploring a potential sale, reportedly eyeing interest from the private equity firm Sycamore Partners? This move comes at a time when Walgreens is grappling with significant financial challenges, having reported a staggering loss of $8.6 billion in fiscal 2024 alone. The company’s venture into primary care services has not gone as planned, leading to the closure of multiple VillageMD clinics across the nation. Furthermore, the pharmacy sector faces intense competition from agile online retailers such as Amazon Pharmacy and Mark Cuban’s Cost Plus Drugs, alongside pressures from negotiated drug prices.
Investors are acutely aware of Walgreens’ struggles. Over the past five years, the retail giant’s stock price has plummeted significantly; it is currently trading below $10, a stark contrast to its peak of nearly at the end of 2019. Consequently, when the Wall Street Journal reported last week that Walgreens, based in Deerfield, Illinois, is considering a sale, its shares surged approximately 17% on that day.
If a sale materializes, analysts speculate a potential buyout value between $9.2 billion and $10 billion. Erin Wright, an equity analyst at Morgan Stanley, noted this in a research note following the WSJ report. This is a meager offer compared to the $70 billion bid made by global investment firm KKR to acquire Walgreens back in 2019, according to the Financial Times. Furthermore, a Pitchbook report indicated that the previous deal stalled due to disagreements over Walgreens’ valuation.
In light of its current predicament, is selling to a private equity entity the right strategy for Walgreens? The consensus among some experts appears to lean towards “yes.”
“At this juncture, innovative thinking is essential to reimagine how the company’s assets can be utilized more effectively,” stated Michael Abrams, managing partner at Numerof & Associates, a consulting firm.
Walgreens and Sycamore Partners have both declined to comment on the matter.
Exploring the Reasons Behind Walgreens’ Potential Sale
The speculation surrounding Walgreens’ potential sale arises after nearly a decade of attempts to reinvigorate growth, as noted by Abrams. During this period, Walgreens’ market valuation has plummeted from over 0 billion to less than $8 billion. The company has employed various strategies in an effort to turn its fortunes around, including expanding into Europe through its acquisition of Alliance Boots and investing around $5.2 billion in primary care provider VillageMD.
“The reality is that the pharmacy sector is mature, characterized by flat margins in the core function of dispensing prescriptions,” Abrams explained. “Additionally, the growing influence of pharmacy benefit managers, who negotiate drug prices on behalf of insurers and employers, has turned Walgreens’ extensive network of over 12,000 stores into a liability rather than an asset.”
Competition for retail sales has intensified as well, with companies like Amazon and other e-commerce platforms making significant inroads into Walgreens’ market share.
Experts are hopeful that a sale to a private equity firm could catalyze operational enhancements and growth for Walgreens. According to Keith Campbell, leader of West Monroe’s merger & acquisition practice, “By closing underperforming locations and engaging in sale-and-leaseback transactions, Walgreens could alleviate debt and optimize its operations.” He added that once the retail sector becomes stabilized and cash flow positive, the focus could shift toward high-growth areas like home care and rare/orphan drug compounding.
However, why is Sycamore Partners the focal point of this interest? The firm has limited experience in the healthcare sector, often engaging in smaller-scale deals compared to Walgreens. Abrams highlighted that they may need to divest parts of the business or enlist partners to facilitate the transaction.
The attraction may lie in Sycamore Partners’ specialization in retail and consumer investments. Abrams pointed out that their portfolio includes recognized brands such as Staples and clothing retailers Hot Topic, Ann Taylor, and Chico’s.
This retail and consumer-centric approach resonates with Hal Andrews, president and CEO of Trilliant Health. He emphasized that the beauty segment within Boots stores in London is nearly as prominent as the pharmacy segment. “Boots is fundamentally a consumer-driven business, emphasizing health, wellness, and beauty. Yet, healthcare operates on a different level,” he elaborated. “Sycamore’s interest indicates they see a significant opportunity to prioritize the retail and consumer health aspects over hands-on medical services like VillageMD.”
Evaluating Whether This Is a Strategic Move
At this pivotal moment, selling to a private equity firm like Sycamore Partners could indeed be a prudent strategy for Walgreens, according to Abrams.
“Walgreens missed its chance to diversify into the pharmacy benefit management (PBM) or insurance sectors years ago, leaving it vulnerable to competitors like CVS,” he asserted. “Their attempts to penetrate the primary care domain were well-intentioned, but the company underestimated the resources and effort required to shift public perception of local drugstores as care providers.”
Another consultant echoed Abrams’ perspective, emphasizing that Walgreens must enact significant strategic changes to avoid further decline.
“A private equity owner could potentially drive necessary transformations, focusing on e-commerce, reevaluating the retail footprint, and pursuing mergers & acquisitions to expand into adjacent healthcare services,” said Howard Gutman, private equity strategy lead at MorganFranklin Consulting. “However, executing this transformation will require Walgreens to build new capabilities in digital operations, M&A integration, and managing a diversified business model. This reinforces the rationale for seeking the right private equity partner.”
Andrews of Trilliant Health noted that while he cannot definitively predict the success of this move for Walgreens, he recognizes that restructuring is often smoother when a business is privately held, free from the pressures of quarterly public reporting.
“This enables management to concentrate on their objectives without the constant worry of Wall Street’s reactions and stock fluctuations,” he explained. “Such clarity fosters a stronger focus on executing plans rather than being preoccupied with external opinions.”
Even though a private equity deal seems like a sensible choice for Walgreens to several experts, Wright from Morgan Stanley remains skeptical about the feasibility of such a transaction.
“While we acknowledge the context surrounding a potential sale amid challenging pharmacy conditions, a buyout is complicated by Walgreens’ significant debt load and weak cash flow, making the path to value creation less clear,” Wright stated in an analyst note.
Andrews added that Sycamore Partners may not be the sole interested party in Walgreens, with the possibility of additional competitors entering the fray with alternative offers.
“This is merely the first step, and observing whether other private equity firms emerge with competing bids will be intriguing,” he remarked.
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