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 $8 billion from more than $100 billion in the past decade before Sycamore’s interest emerged in December. The pharmacist has endured myriad problems, which are ongoing. Selling consumer health care 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 health care 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 $13 billion. Add assumed net debt, the cost of opioid settlements and certain other financial obligations and the total transaction value hits some $24 billion, says Walgreens. That’s around seven times the business’s expected earnings before interest, tax, depreciation and amortization 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 $2.7 billion of the payment to shareholders depends on the disposal of the primary health care 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-energized by the private-credit industry. The acquisition debt here could be around $12 billion, Bloomberg News reported.
