It's a tumultuous time for struggling U.S. drugstore chains, and Walgreens Boots Alliance is trying to execute its turnaround by going private in a $10 billion buyout deal with Sycamore Partners.
Walgreens, the Deerfield, Illinois-based chain that announced in October it was closing roughly 1,200 underperforming U.S. stores, on Thursday said it had entered into a definitive agreement to be acquired by Sycamore, a private equity firm headquartered in New York that specializes in retail, consumer and distribution-related investments.
The deal is one of the biggest leveraged buyouts in recent memory, with an equity value of roughly $10 billion. The transaction's total value may reach $23.7 billion when debt, capital leases and future payouts are included, according to Walgreens.
Sycamore will pay Walgreens' stockholders $11.45 per share in cash, a 29% premium above what the stock was trading for last year. Shareholders could also receive another $3 per share from proceeds if Walgreens sells its interest in VillageMD, which includes the Village Medical, Summit Health and CityMD primary care businesses.
A perfect storm of problems has roiled the pharmacy business, affecting not only Walgreens but also CVS Health and Rite Aid.
Not only have consumers cut back on spending, but drugstore chains are under financial pressure due to lower reimbursement rates from insurers, as well as retail juggernauts such as Walmart, Target and Amazon entering the pharmacy arena. Walgreens' expansion into primary healthcare and related acquisitions didn't appear to pan out.
Store closings
In September, Rite Aid emerged from Chapter 11 with what it called a "rightsized store footprint" of about 1,300 stores, down from the 2,100 it had a year earlier. And back in November 2021, CVS said it planned to shutter 900 stores in the next few years.
Walgreens, a public company since 1927, said it will benefit from leveraging its healthcare experience and Sycamore’s established leadership in retail and consumer services. The company will continue to operate under the Walgreens and Boots names and maintain its headquarters in the Chicago area.
"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," Walgreens CEO Tim Wentworth said in a statement.
He added, "Sycamore will provide us with the expertise and experience of a partner with a strong track record of successful retail turnarounds. The [Walgeens] board considered all these factors in evaluating this transaction, and we believe this agreement provides shareholders premium cash value, with the ability to benefit from additional value creation going forward from monetization of the VillageMD businesses.”
The deal "reflects our confidence in [Walgreens'] pharmacy-led model and essential role in driving better outcomes for patients, customers and communities,” Stefan Kaluzny, Sycamore managing director, said in the statement.
‘Variety of options’
Back in October, Walgreens announced it would focus on monetizing noncore assets — including VillageMD — to generate cash. VillageMD acquired Summit Heath, urgent care chain CityMD's parent, for $8.9 billion in 2023. In its statement Thursday, Walgreens said it "is currently evaluating a variety of options with respect to its significant debt and equity interests" in those businesses.
Once the Sycamore transaction closes, a special committee will determine what to do with VillageMD and the other primary care units, according to Walgreens.
Walgreens merged with Alliance Boots in 2014, to form Walgreens Boots Alliance, aiming to create the first global pharmacy-led health company. The company said it now has 12,500 retail pharmacy locations in the United States, Europe and Latin America. In October, Wentworth said about 6,000 of the company's 8,000 U.S. stores were profitable.
Neil Saunders, a retail analyst and managing director of analytics firm GlobalData, raised questions about the Walgreens buyout in a post on LinkedIn.
"What a fall from grace for a company once worth over $100 billion," Saunders said. "That differential is, by and large, the cost of running the business badly. There have been so many squandered opportunities down the years. Of course, going private solves nothing in and of itself, but it’s now the easiest way to extract value from the business. My hope is that Boots gets well treated. Boots is, and always has been, a way better retailer than Walgreens."
Walgeens didn't immediately respond to an email from CoStar News seeking comment on Saunders' remarks.