While just a decade ago Walgreens was worth approximately $100 billion, it is now valued at just a fraction of that amount.
Walgreens Boots Alliance announced on Thursday that it would be taken private by Sycamore Partners for $10 billion. The second-largest US pharmacy chain will close out nearly a century after having traded on public markets. While just a decade ago Walgreens was worth approximately $100 billion, it is now valued at just a fraction of that amount.
The company’s fortunes turned due to drug margins falling and consumers opting for Amazon and Walmart, which were cheaper alternatives to fill their prescriptions and for their other necessities, such as toiletries.
Yet another fumble which has cost Walgreens heavily is its decision to invest billions into buying other pharmacy chains such as Alliance Boots despite market trends showing in-store purchases declining. Industry rivals on the other hand had begun diversifying their investments into insurance and prescription management.
Reuters reported that Sycamore has valued each share at $11.45 and has agreed to a premium of 8% to Walgreens’ closing price of $10.60. Company shares rose by 6% in extended trading once this news broke. There is also a possibility of Walgreens shareholders to receive $3 in cash from future monetization of its debt and equity interests.
The company’s market capitalization has declined 90% since 2015 and closed at $9.3 billion. Debt and lease commitments had expanded to $30 billion. Leerink Partners investment bank has estimated that the transaction, which is inclusive of payouts and debts, is valued at $23.7 billion.
With Walgreens’ misfortunes, the intention behind Sycamore’s decision to acquire it arises. However, this is not the first time it has bought out a retailer in distress. A private equity firm, Sycamore, has previously acquired brands such as Staples, Talbots and Nine West for profit.
This equity firm, which specializes in retail and consumer investments, has previously resorted to selling off a newly acquired company’s most valuable assets and cost reduction through store closures, and using savings to draw dividends and not focusing on growth.
According to financial analysts, going private may seem like the right decision given the circumstances, but Walgreens’ operational challenges can be handled more effectively if it does not have any commitments towards its shareholders.
Company CEO Tim Wentworth said that while the company was making considerable strides in its turnaround strategy, but considerable value creation would require more time, focus and the management of a private company.
This acquisition by Sycamore comes six years after Walgreens has been trying to sell off some of its assets or the company as a whole. Having assessed the worst-case scenario, Sycamore negotiated a price, after ascertaining the minimum amount it could recover should Walgreens’ assets be split up and sold or run separately.
Private equity firm KKR had made an offer for $70 billion back in 2019 to buy out Walgreens; however, according to reports from Morgan Stanley, these negotiations did not proceed.
The pharmaceutical retailer has had to make some difficult decisions over the past years, closing thousands of stores and enforcing a billion-dollar cost-cutting program. Although these measures have proved successful to a certain extent, the company still suffers from contracting cash flow and is bound to pay off more than half of its $7 billion debt next year.
While the present CEO Wentworth is the one who has had to take these tough calls, most of the company’s mistakes were made under the former CEO Stefano Pessina, who is incidentally Walgreens’s single-largest shareholder. It was under his leadership that market capitalization was reduced to less than $50 billion in 2021.
Although the deal includes a 35-day go-shop period, which allows Walgreens to legally look into potential competitors and bidders, despite receiving an official offer from Sycamore, it is unlikely that the pharma chain will receive an outbidder at this stage.
