Sycamore Partners buys Walgreens for $10 billion amid struggles
Sycamore Partners buys Walgreens for $10 billion amid struggles: Walgreens Boots Alliance, one of the largest pharmacy chains in the US, announced that it has agreed to be acquired by private equity firm Sycamore Partners. The struggling retailer, which has been losing money for years, sees the move as an opportunity to turn its business around and regain financial stability. Walgreens confirmed on Thursday that Sycamore will buy the company for $11.45 per share, valuing the deal at less than $10 billion in equity. Shareholders could receive up to an additional $3 per share under certain circumstances. Including debt, the total value of the acquisition is estimated at about $24 billion.
The decision to take Walgreens private is expected to give the company greater flexibility to implement strategic changes without the constant scrutiny of Wall Street investors. As a publicly traded company since 1927, Walgreens has struggled to overcome financial pressures as it seeks to improve its operations and increase profitability. Founded in 1901, Walgreens has faced a number of challenges in recent years. The company has been hit by low prescription reimbursement rates, rising operating costs and widespread retail theft. In addition, inflation-sensitive shoppers are turning to discount retailers, which is reducing Walgreens’ revenue from non-pharmacy sales.
A key part of Walgreens’ turnaround strategy is closing underperforming stores. The company announced plans to close 1,200 of its roughly 8,500 U.S. locations. This follows a previous downsizing effort in which Walgreens reduced its store count from about 9,500 after purchasing select Rite Aid locations in 2018. Walgreens is also expanding its U.S. healthcare operations, notably through its VillageMD clinic business. However, last August, the company indicated that it was reviewing its healthcare investments and considering selling all or part of its VillageMD business. The decision comes less than two years after Walgreens paid billions of dollars to expand its presence in the healthcare sector.
Sycamore Partners buys Walgreens for $10 billion amid struggles
Financially, Walgreens is under significant pressure. The company’s stock has lost nearly two-thirds of its value in 2023. However, Walgreens said that Sycamore’s offer represents a premium of about 30% to its stock price, which was the point at which rumors of a sale emerged in December. CEO Tim Wentworth confirmed in January that the company was actively engaged in the sale process. Earlier this year, Walgreens reported progress in improving its prescription reimbursement model, which is key to its revenue. In addition, the company is taking steps to conserve cash and reduce debt. In January, Walgreens made the difficult decision to stop its quarterly dividend, a payment it has consistently made for more than 90 years.
Another move to improve its financial health is Walgreens’ reduction of its stake in pharmaceutical distributor Senkora. The company is selling part of its investment in Senkora to generate cash, partly to help pay down its outstanding debt. Financial analysts agree that improving cash flow is critical for Walgreens, whether it goes public or goes private. According to Michael Cherny, an analyst at Leerink Partners, the company’s ability to generate cash flow will determine the success of any turnaround effort.
“Management has not been shy about its effort to improve the cash flow generation profile as part of the turnaround plan,” Cherny wrote in a Feb. 23 research note. “Without cash flow, none of the value cases work.” Although Walgreens is primarily known for its U.S. pharmacy operations, the company also operates nearly 3,700 international stores. These locations are spread across countries including the United Kingdom, Mexico, Thailand, and Ireland. The company’s global reach is an important part of its business strategy, although its main struggles are tied to its U.S. operations.
Walgreens’ acquisition comes at a time of major changes in the pharmacy retail sector. Its competitor, Rite Aid, emerged from Chapter 11 bankruptcy in September 2023 as a private company after its own financial troubles. Meanwhile, the nation’s largest drugstore operator, CVS Health Corp., is publicly traded and continues to expand its presence in health care services. In addition, large retail chains such as Walmart and Kroger are operating pharmacies in their stores, increasing competition for Walgreens. As more consumers turn to alternative options for their pharmaceutical and health care needs, Walgreens has had to rethink its business model to remain competitive.
Going private under Sycamore Partners’ ownership allows Walgreens to make bold strategic changes without immediate pressure from public shareholders. Private equity firms often focus on restructuring companies, cutting costs and streamlining operations to increase profitability before considering a potential resale or relisting on the stock market. It remains unclear what specific changes Sycamore Partners will implement once the acquisition is complete. However, given Walgreens’ ongoing struggles, it is likely to focus on cutting costs, improving cash flow and selling non-core assets to refocus the business.
For customers, the acquisition could mean changes to store layouts, pricing strategies and service offerings. Employees could also see changes to company policies and restructuring efforts as Walgreens becomes a private company. The acquisition of Walgreens by Sycamore Partners marks a significant shift for the historic pharmacy chain. After decades as a publicly traded company, Walgreens is exiting the stock market to regain stability and reposition itself for long-term success. The acquisition offers an opportunity for much-needed restructuring, but the challenges facing the company are significant.
As Walgreens moves forward with its transformation plan, industry experts will be watching closely to see how Sycamore Partners will lead the company through its financial woes and into a new era. Whether this acquisition will be key to reviving Walgreens or just another chapter in its ongoing troubles remains to be seen.