THE deal just announced for Walgreens Boots Alliance Inc is above all a massive transaction.
But its size relative to the buyer – the low-profile private equity firm Sycamore Partners – is equally stunning.
The days of “Sycamore who?” are over.
Walgreens’ market value had shrunk to less than US$8bil from more than US$100bil in the past decade before Sycamore’s interest emerged in December.
The pharmacist has endured myriad problems, which are ongoing.
Selling consumer healthcare products from stores is a low-growth business facing competition from Amazon.com Inc and WalMart Inc.
Those challenges are exacerbated by high theft rates.
And Walgreens’ foray into healthcare services, providing access to physicians in clinics, has proved a costly mistake.
Sycamore’s past investments include fashion brand Kurt Geiger, home-improvements retailer RONA and office-supplies seller Staples.
Here, it sees turnaround potential that can best be achieved away from the public markets.
So too does Walgreens’ main shareholder, chairman Stefano Pessina; he’s rolling his 17% stake into the buyout vehicle and will buy more shares too.
The deal values the equity at as much as US$13bil. Add assumed net debt, the cost of opioid settlements and certain other financial obligations and the total transaction value hits some US$24bil, says Walgreens.
That’s around seven times the business’s expected earnings before interest, tax, depreciation and amortisation for the current financial year.
True, the total cost for Sycamore will be lower. For starters, there’s no need to buy out Pessina’s stake.
And up to US$2.7bil of the payment to shareholders depends on the disposal of the primary healthcare business.
The risk of these assets fetching a bad price remains with Walgreens investors.
The good news for them is that Pessina is also exposed to the outcome of the sale, and will be involved in the process.
Even adjusting for these aspects, this is still a jumbo undertaking.
It confirms just how much the financing markets have been re-energised by the private-credit industry.
The acquisition debt here could be around US$12bil, Bloomberg News reported. A take-private offer comes near the share-price low.
Of course, the clever structuring means it’s not clear what ordinary shareholders will get paid.
They’re guaranteed US$11.45 a share, 29% more than the pre-bid stock price.
That’s a low premium for a takeover of a company whose shares have fallen so far.
That uplift could rise to as much as 63%, depending on the value of the asset sales.
Even at the top end, the deal would value Walgreens stock below where it was trading as recently as June of last year, and only 37% above the average pre-bid analyst price target.
Currently, analysts are sceptical that a better offer will come along in the next month or so when the company will solicit and potentially evaluate other offers.
Arguably, the uncertainties are greater on Sycamore’s side.
Even after leaving some risks with Walgreens shareholders, the New York-based firm has taken on the colossal operational challenge of turning around this bricks-and-mortar business.
If it succeeds, there’s the question of the exit. A sale of the UK Boots chain could provide a chunk of cash.
Sycamore nevertheless appears to be taking a bet on initial public offerings rebounding in the coming years, and institutional investors regaining their appetite for a sector that’s caused them so much disappointment.
Rival CVS Health Corp has also been a painful stock to hold in recent years.
Underdog buyout bidders can, of course, come out as big winners – consider EQT AB’s success after winning the toppy auction for Nestle SA’s skincare business in 2019.
What Sycamore lacks in size it may make up for in retail expertise, but it has work to do to become another such example.
Walgreens shareholders may have preferred a cleaner deal with a clearer price, and a chance to be paid something better than the stock’s one-year high.
They may yet be on the better side of this transaction. — Bloomberg
Chris Hughes is a Bloomberg Opinion columnist covering deals. The views expressed here are the writer’s own.
