Walgreens Boots Alliance (WBA.O) will be taken private by Sycamore Partners for $10 billion, the firms said on Thursday, closing out nearly a century of trading on public markets for the U.S. pharmacy giant.
The price is a fraction of the $100 billion the second-largest U.S. pharmacy chain was worth a decade ago. Its fortunes collapsed as drug margins fell and as consumers turned to cheaper rivals such as Amazon (AMZN.O) and Walmart (WMT.N) to fill their prescriptions and purchase toiletries.
And when rivals diversified into insurance or prescription management, Walgreens invested billions of dollars in buying other pharmacy chains such as European giant Alliance Boots despite the trend away from in-store shopping.
Sycamore will pay $11.45 per share, a premium of 8% to Walgreens' closing price of $10.60 on Thursday. Shares of the company rose nearly 6% in extended trading.
Walgreens shareholders could also receive an additional $3 in cash from future monetization of the company's debt and equity interests in primary-care provider VillageMD.
The company's market capitalization has dropped 90% since 2015 to $9.3 billion on Thursday, with debt and lease obligations ballooning to almost $30 billion.
The transaction has a total value of around $23.7 billion including payouts and debt, according to Leerink Partners investment bank.
The final acquisition price was calculated by Sycamore considering the worst-case scenario, based on the minimum price it could recover if assets had to be split for a sale or to be run separately, a person close to the discussions said.
"You have a business that is shrinking, and then you layer on losses and cash burn, all of that was the perfect recipe for what we are seeing today," said Brian Tanquilut, a healthcare services research analyst at Jefferies.
Sycamore, a private equity firm that specializes in retail and consumer investments, has a track record of acquiring distressed retailers for profit including brands such as Staples, Talbots and Nine West.
Its past approach has involved selling the companies' most valuable assets, and reducing costs in the remaining operations through store closures and other measures, with savings often used to draw dividends and not necessarily aimed at growth.
"Going private makes sense on paper," said Ann Hynes, an analyst with Mizuho Bank, adding that Walgreens' operational challenges would likely better be handled without commitments to shareholders.
Walgreens Boots Alliance CEO Tim Wentworth said in a statement that the company was making progress on its turnaround strategy, but meaningful value creation would take "time, focus and change that is better managed as a private company".
Walgreens has been trying to sell some of its assets or the company as a whole for at least six years.
In 2019, private equity firm KKR offered $70 billion for the retailer in private talks that did not advance, according to a Morgan Stanley report.
DOWNFALL
Walgreens has been suffering from reduced cash flow, and more than half of its $7 billion in net debt is due next year.
The company is closing thousands of stores and has embarked on a $1 billion cost-cutting program under CEO Tim Wentworth, with some success.
It currently employs 312,000 people in 12,000 stores in eight countries, according to its website, a sharp decline from the 25 countries, 450,000 employees and 21,000 stores it had four years ago.
Many of the company's missteps were under former CEO Stefano Pessina, also its largest single shareholder, whose tenure at the helm saw Walgreens' market capitalization shrink by about half to less than $50 billion when he exited in 2021.
In 2021, Walgreens announced it took a majority interest in VillageMD for $5.2 billion, following its initial stake acquisition in 2019. That proved to be a cash drain and is now a good exit candidate for Sycamore.
Walgreens concluded a two-step acquisition of Swiss-based Alliance Boots in 2014, a pharmacy-led health and beauty group that is now considered by analysts as a likely candidate for a spin-off.
The company stuck to its buying spree, snapping up almost 2,000 stores from its former rival Rite Aid Corp in 2018. But that store footprint proved too big and soon after the acquisition, Walgreens started to close locations.
There were also missed opportunities. While its top rival CVS has diversified its business beyond retail, including acquiring U.S. health insurer Aetna for almost $70 billion in 2018, Walgreens reportedly considered buying insurer Humana (HUM.N) but eventually dropped the idea.
The deal includes a 35-day go-shop period.
"Given the size and number of moving parts involved - a potential split of the U.S. business, Boots, and Health - we don't expect a competing bid to come over the top," said Michael Cherny, an analyst with Leerink.
