Is anybody stunned that Walgreens is seeking to promote itself — reportedly to personal fairness agency Sycamore Companions?
Walgreens has been dropping quite a lot of dollars recently: a whopping $8.6 billion of them in fiscal 2024. Its foray into major care has been a problem forcing it to shut a collection of VillageMD clinics nationwide. Even its pharmacy enterprise has confronted competitors from nimble, on-line pharmacy retailers like Amazon Pharmacy and Mark Cuban’s Value Plus Medicine and fallen casualty to drug costs being negotiated.
And traders have paid consideration to its missteps. Over the previous 5 years, the inventory worth of the retail large, if we will even use that time period anymore, has floundered — it’s at the moment buying and selling at lower than $10 down from a excessive of practically $40 on the finish of 2019.
So, when the Wall Road Journal reported final week that Deerfield, Illinois-based Walgreens is exploring a sale, the struggling retailer’s shares jumped by about 17% that day.
If a deal had been to happen, there might be a possible buyout of about $9.2 billion to $10 billion, wrote Erin Wright, an fairness analyst with Morgan Stanley, in a analysis notice following the WSJ report. It’s slim pickings provided that the worldwide funding agency KKR made a $70 billion supply to purchase Walgreens in 2019, in keeping with the Monetary Occasions. A report from Pitchbook confirmed that the deal reportedly stalled as a result of KKR and its potential financiers couldn’t agree on Walgreens’ valuation.
Given its diminished standing, is promoting to a non-public fairness purchaser transfer for Walgreens?
The reply seems to be “sure” for some specialists.
“At this level, some recent pondering is required to reconceptualize how the corporate’s property might be extra fruitfully employed,” mentioned Michael Abrams, managing accomplice of Numerof & Associates, a consulting agency.
Walgreens and Sycamore Companions declined to remark.
Why Walgreens Might Need to Promote Itself
The rumors about Walgreens contemplating a sale come after practically a decade of efforts to revive progress, in keeping with Abrams. Throughout that point, its market worth fell from over $100 billion to beneath $8 billion, he mentioned.
He added that the corporate has tried quite a few methods to show issues round, together with increasing into Europe with its acquisition of Alliance Boots and shopping for a stake in major care supplier VillageMD for about $5.2 billion.
“The very fact of the matter is that the pharmacy enterprise is a mature one with flat margins within the core perform of meting out prescribed drugs,” Abrams mentioned. “Add to that rising strain from pharmacy profit managers who negotiate drug costs on behalf of insurers and employers, and Walgreens’ extraordinary community of over 12,000 shops is much less an asset than a legal responsibility.”
He added that gross sales for retail merchandise have confronted elevated competitors from Amazon and different e-commerce websites.
The hope is that promoting to a non-public fairness agency may assist Walgreens make operational enhancements and develop, in keeping with Keith Campbell, the chief of West Monroe’s merger & acquisition observe. West Monroe is a consulting agency.
“By closing underperforming places and leveraging sale-and-leaseback transactions, Walgreens may scale back debt and streamline operations,” Campbell mentioned. “As soon as the retail enterprise is stabilized and money circulation constructive, the main target may shift to high-growth segments like dwelling care and uncommon/orphan drug compounding.”
However why Sycamore Companions? In any case, the corporate doesn’t have a lot expertise in healthcare. It has traditionally executed smaller offers than Walgreens and would most likely should unload elements of its enterprise or herald companions to get the deal via, Abrams identified.
The important thing attraction might be that the New York-based agency focuses on retail and shopper investments. Abrams acknowledged that its portfolio consists of workplace provide retailer Staples and outfitters Sizzling Matter, Ann Taylor and Chico’s.
The truth that Sycamore Companions is extra retail-oriented and consumer-focused is attention-grabbing to Hal Andrews, president and CEO of Trilliant Well being. He famous that the sweetness enterprise at Boots shops in London is simply as outstanding because the pharmacy enterprise, if no more.
“Boots, from simply an expertise standpoint, is far more of a shopper enterprise round well being and wellness and wonder. … However healthcare is a really totally different factor,” he mentioned. “The truth that Sycamore is means that they see a chance to essentially deal with the retail aspect, the buyer aspect, the well being and wonder a part of the enterprise, and never a lot on the healthcare aspect, whether or not that’s VillageMD or Shields or anything that’s actually hands-on drugs versus retail well being.”
Is that this the proper transfer?
At this level, promoting to a non-public fairness purchaser like Sycamore Companions often is the proper name for Walgreens, Abrams mentioned.
“Walgreens missed the chance to diversify into the PBM or insurance coverage area years in the past, and so has been on the mercy of others like CVS who did,” he declared. “Their effort to enter the first care area made sense, however the firm underestimated the associated fee and energy concerned in altering the general public’s expectations to see the native drug retailer as a care supplier.”
One other guide echoed Abrams’ feedback, noting that the faltering retail large must make a strategic change so as to keep away from “additional decline.”
“I believe proper now a non-public fairness proprietor may probably drive the wanted modifications, equivalent to a larger deal with e-commerce, rethinking the retail footprint, and pursuing M&A to increase into adjoining healthcare providers,” mentioned Howard Gutman, personal fairness technique and protection lead for MorganFranklin Consulting. “Nevertheless, efficiently executing this transformation would require Walgreens to develop new capabilities round digital operations, M&A integration, and managing a extra diversified enterprise mannequin. That is one more reason I believe the transfer in the direction of discovering the proper personal fairness accomplice is sensible.”
Andrews of Trilliant Well being acknowledged that he can’t say for certain whether or not that is the proper transfer for Walgreens. As an govt, nonetheless, he did notice that when an organization must restructure a enterprise, it’s a lot simpler to do this while you’re privately held and never reporting to Wall Road each 90 days.
“It permits the administration staff to only deal with the aims and never fear about what Wall Road’s gonna say each 90 days and whether or not the inventory is gonna go up or down,” he mentioned. “It permits for readability, and readability permits for extra deal with executing the plan, versus worrying about what individuals give it some thought.”
Though a non-public fairness deal looks like the smart move for Walgreens to some, Wright of Morgan Stanley doesn’t appear to suppose the deal will undergo.
“Whereas we acknowledge the context round a possible sale in a difficult pharmacy backdrop, a buyout is more durable to ponder given its already sizable debt burden and paltry money circulation, making the worth creation pathway more durable to decipher,” Wright acknowledged within the analyst notice.
Andrews added that Sycamore Companions will not be the one get together in Walgreens and there may very properly be extra potential patrons down the street with competing gives.
“That is actually simply the first step, and it’ll be attention-grabbing to see whether or not one other personal fairness agency steps in,” he mentioned.
Picture: alexsl, Getty Photos
