TLDR
- Walgreens Boots Alliance will be taken private by Sycamore Partners in a deal valued at $10 billion, with potential for an additional $3 per share from VillageMD monetization
- The pharmacy chain’s value has plummeted from $100 billion a decade ago to under $10 billion today due to competition from Amazon, Walmart, and other retailers
- Walgreens struggled with reduced cash flow and debt problems, recently suspending its dividend for the first time in company history
- The deal follows years of unsuccessful turnaround attempts, store closures, and costly acquisitions that didn’t pan out
- CEO Tim Wentworth stated that “meaningful value creation will take time, focus and change that is better managed as a private company”
Walgreens Boots Alliance, one of America’s largest pharmacy chains, is set to exit the public markets after nearly a century. The company announced on Thursday that it will be acquired by private equity firm Sycamore Partners in a $10 billion deal.
Sycamore will pay $11.45 per share, representing an 8% premium over Walgreens’ closing price of $10.60 on
Thursday. Shareholders could receive an additional $3 per share from future monetization of the company’s interests in VillageMD.
The deal marks a dramatic fall for a company once valued at $100 billion just a decade ago. Today, Walgreens’ market capitalization sits at just $9.3 billion, a 90% drop since 2015.
“While we are making progress against our ambitious turnaround strategy, meaningful value creation will take time, focus and change that is better managed as a private company,” said Walgreens CEO Tim Wentworth in a statement.
The pharmacy giant has faced mounting challenges in recent years. Consumers have increasingly turned to cheaper competitors like Amazon and Walmart for prescriptions and everyday items.
Drug margins have fallen across the industry. Meanwhile, debt and lease obligations ballooned to almost $30 billion as Walgreens made costly acquisitions.
The company’s decline accelerated under former CEO Stefano Pessina. During his tenure from 2015 to 2021, Walgreens’ market value shrank by about half to less than $50 billion.
Many of Walgreens’ acquisitions did not produce the expected returns. In 2014, the company completed its acquisition of Swiss-based Alliance Boots, which analysts now consider a likely candidate for spin-off under Sycamore’s ownership.
In 2018, Walgreens acquired nearly 2,000 stores from rival Rite Aid, only to begin closing locations shortly afterward. The company recently announced plans to close thousands of stores as part of a $1 billion cost-cutting program.
Perhaps most damagingly, Walgreens failed to diversify beyond retail at a time when its main competitor, CVS, was expanding into healthcare services and insurance. CVS acquired health insurer Aetna for nearly $70 billion in 2018.
Walgreens reportedly considered purchasing insurer Humana but abandoned the idea. Instead, it invested $5.2 billion to take a majority stake in VillageMD in 2021, which proved to be a cash drain.
The company suspended its quarterly dividend to shareholders for the first time in its history this January. Walgreens cited the need to strengthen its balance sheet and reduce debt.
Sycamore Partners has a history of acquiring distressed retailers
Sycamore Partners, which specializes in retail investments, has a history of acquiring distressed retailers. Its portfolio includes brands such as Staples, Talbots, and Nine West.
Analysts note that Sycamore’s typical approach involves selling valuable assets and reducing costs through store closures and other measures. The firm often uses these savings to draw dividends rather than fueling growth.
The deal includes a 35-day “go-shop” period, allowing Walgreens to solicit other bids. However, analysts don’t expect competing offers due to the complexity of the company’s structure.
Walgreens currently employs 312,000 people across 12,000 stores in eight countries. This represents a sharp decline from just four years ago, when it operated in 25 countries with 450,000 employees and 21,000 stores.
The transaction has a total value of approximately $23.7 billion including debt, according to Leerink Partners investment bank. The deal includes all elements of Walgreens, including its VillageMD stake and specialty pharmacy unit.
The decline of standalone retail pharmacies began about a decade ago, according to industry analysts. Online competition from Amazon and direct-to-consumer platforms like Hims & Hers has eaten into market share.
Dollar stores have expanded significantly, creating more competition. Grocery chains have also rolled out their own pharmacy operations, further pressuring traditional drugstore chains.
With more online competition and reimbursement pressures from insurers and pharmacy benefit managers, industry experts believe only vertically integrated healthcare companies like CVS and grocery store pharmacies can survive in the long term.
Walgreens first went public in 1927, 26 years after opening its first store in 1901. The take-private deal is expected to close pending regulatory approvals.
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