Is anybody stunned that Walgreens is seeking to promote itself — reportedly to personal fairness agency Sycamore Companions?
Walgreens has been shedding a variety of dollars these days: a whopping $8.6 billion of them in fiscal 2024. Its foray into major care has been a problem forcing it to shut a sequence 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 Medication 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 are able to 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 almost $40 on the finish of 2019.
So, when the Wall Avenue 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 have been to happen, there could possibly be a possible buyout of about $9.2 billion to $10 billion, wrote Erin Wright, an fairness analyst with Morgan Stanley, in a analysis word following the WSJ report. It’s slim pickings on condition that the worldwide funding agency KKR made a $70 billion supply to purchase Walgreens in 2019, in line 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 a superb transfer for Walgreens?
The reply seems to be “sure” for some consultants.
“At this level, some contemporary considering is required to reconceptualize how the corporate’s belongings could be extra fruitfully employed,” mentioned Michael Abrams, managing associate of Numerof & Associates, a consulting agency.
Walgreens and Sycamore Companions declined to remark.
Why Walgreens Could Need to Promote Itself
The rumors about Walgreens contemplating a sale come after almost a decade of efforts to revive development, in line with Abrams. Throughout that point, its market worth fell from over $100 billion to under $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 operate of shelling out pharmaceuticals,” 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 line with Keith Campbell, the chief of West Monroe’s merger & acquisition observe. West Monroe is a consulting agency.
“By closing underperforming areas and leveraging sale-and-leaseback transactions, Walgreens may cut back debt and streamline operations,” Campbell mentioned. “As soon as the retail enterprise is stabilized and money move optimistic, the main target may shift to high-growth segments like residence care and uncommon/orphan drug compounding.”
However why Sycamore Companions? In spite of everything, the corporate doesn’t have a lot expertise in healthcare. It has traditionally performed smaller offers than Walgreens and would most likely should unload components of its enterprise or herald companions to get the deal by means of, Abrams identified.
The important thing attraction could possibly be that the New York-based agency makes a speciality of retail and shopper investments. Abrams said that its portfolio contains workplace provide retailer Staples and clothes shops Scorching Matter, Ann Taylor and Chico’s.
The truth that Sycamore Companions is extra retail-oriented and consumer-focused is fascinating 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 completely different factor,” he mentioned. “The truth that Sycamore is means that they see a possibility to actually deal with the retail facet, the patron facet, the well being and wonder a part of the enterprise, and never a lot on the healthcare facet, whether or not that’s VillageMD or Shields or the rest that’s actually hands-on drugs versus retail well being.”
Is that this the precise transfer?
At this level, promoting to a non-public fairness purchaser like Sycamore Companions would be 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 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 in an effort to keep away from “additional decline.”
“I feel proper now a non-public fairness proprietor may probably drive the wanted adjustments, similar to a better deal with e-commerce, rethinking the retail footprint, and pursuing M&A to increase into adjoining healthcare companies,” mentioned Howard Gutman, non-public fairness technique and protection lead for MorganFranklin Consulting. “Nonetheless, 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 feel the transfer in direction of discovering the precise non-public fairness associate is smart.”
Andrews of Trilliant Well being said that he can’t say for positive whether or not that is the precise transfer for Walgreens. As an govt, nonetheless, he did word that when an organization must restructure a enterprise, it’s a lot simpler to try this if you’re privately held and never reporting to Wall Avenue each 90 days.
“It permits the administration workforce to only deal with the goals and never fear about what Wall Avenue’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 as if the good 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 tougher to ponder given its already sizable debt burden and paltry money move, making the worth creation pathway tougher to decipher,” Wright said within the analyst word.
Andrews added that Sycamore Companions will not be the one occasion in Walgreens and there may very nicely be further potential patrons down the highway with competing gives.
“That is actually simply the 1st step, and it’ll be fascinating to see whether or not one other non-public fairness agency steps in,” he mentioned.
Photograph: alexsl, Getty Photos
