Walgreens Boots Alliance sold to private equity firm - will Boots get the boot?

Recently, Walgreens Boots Alliance struck a deal with private-equity group Sycamore Partners that will “bring the struggling pharmacy chain’s century-long run as a public company to an end”, says the Financial Times. Sycamore agreed to pay $11.45 a share, a premium of almost 30% to the price before news of a possible deal emerged in December. Sycamore is valuing the business, including its debt, at $23.7 billion. Billionaire Stefano Pessina, Walgreens’ executive chairman and largest shareholder, will maintain a “sizeable minority shareholding” in the business.

Despite retaining a stake, the deal is a blow for Pessina. He “spent half a century building a pharmacy behemoth that stretches almost three times further than the Roman empire ever did”, says Benjamin Katz in The Wall Street Journal. After turning around and expanding his father’s “fledgling and failing pharmaceutical wholesaler”, he merged it with UniChem in 1997 and bought Boots in 2006. That combination was in turn acquired by Walgreens in 2014, creating a conglomerate with a peak market value in excess of $100 billion. However, it struggled with Amazon “quickly eating into drugstores’ non-medical revenues”. This forced it to cancel its dividend and slash the store’s portfolio.

What does the Walgreens sale mean for Boots?

Walgreens proved unable to deal with the challenges posed by both Amazon and “big-box retailers, such as Walmart and Target”, says Chris Isidore on CNN; “lower reimbursement rates for prescription drugs” in the United States hardly helped matters. However, despite claims that Sycamore’s “strong... record of successful retail turnarounds” will help turn Walgreens around, “retail’s graveyard is full of the bones of many once-dominant retailers who closed up shop after being bought by private-equity firms”. At the very least, “the fundamental problems leading to the private-equity purchase” won’t go away after this deal.

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The fact that Sycamore is using up to $12 billion of leverage to push through the deal will make it even harder for Walgreen’s “miserable decade” to be reversed, says Robert Cyran for Breakingviews. The added debt (assuming a 10% interest rate) will more than double Walgreen’s interest payments, eating into the $1.8 billion in operating profit it is currently making – sharply down from $7 billion in 2018. Far from buying the company to turn it around, Sycamore seems to be aiming at “dismantling it further by splitting out units [such as] Boots”.

The sale “could lay the groundwork for Boots to be relisted or sold out from under its parent”, says Laith Al-Khalaf in The Sunday Times. It makes “little commercial sense” for a US retailer to “retain a UK-centric pharmacy”, especially since there is a feeling that the parent company “has chronically underinvested in Boots”. Still, with 8.1% like-for-like sales growth in the latest quarter, and 15 quarters of rising market share, Boots “is very important for Walgreens”. Sycamore may decide that the best bet is for Boots to remain part of the overall group.

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