(Bloomberg) -- Walgreens Boots Alliance Inc.’s chairman and biggest shareholder, Stefano Pessina, has dealmaking in his DNA. Yet finding a deal to rescue the drugstore empire he built is proving difficult.
When the Italian-born Pessina, 83, merged his Alliance Boots with the US pharmacy giant in 2014, it marked a crowning moment in a decades-long campaign to construct a pharmacy colossus.
The rewards ended up being short-lived. The stock hit an all-time high in 2015, but then spent most of the next nine years on a long slide.
On Thursday, shareholders suffered another blow when Walgreens said it was suspending its quarterly dividend, which it had paid for 92 years. The company said it needed to conserve cash. The stock fell as much as 17% on Friday.
Investors have been hoping that an agreement to take the company private will come together — and give Walgreens space to repair the business.
Private equity firm Sycamore Partners has been speaking with private credit firms about debt financing for a potential Walgreens deal, according to people familiar with the matter, despite an earlier report that takeover talks had stalled. There’s no certainty that a deal will be reached.
Spokespeople for Walgreens and Sycamore declined to comment for this article.
For years, Walgreens made moves that seemed to compound the pain it was already facing because of industrywide pressure on prescription reimbursement rates and competition in the front of the store from online retailers like Amazon.com Inc.
Most notably, it embarked on an expensive foray into patient care in July 2020 with VillageMD. Walgreens pumped money into the business with the idea of creating one-stop shopping for seeing the doctor and picking up prescriptions, but it has ended up with little to show for it.
Sycamore, which is best known for making complexly structured investments in struggling retailers and consumer companies, could seek a pact in which health units like VillageMD are sold. The firm could also refinance Walgreens’ debt so it is attached to certain units and not the entire company, some of the people said.
There are several factors that could make putting a takeover together challenging, though. Walgreens, with a market value Friday of around $8.8 billion, has about $8 billion in debt and another $22 billion in lease obligations. And it is also on the hook for billions of dollars in settlement payments tied to opioid litigation.
“It is not clear how an LBO or a takeout could really put a bunch of debt on this asset and still make a good return, or still be viable,” said Bloomberg Intelligence analyst Jonathan Palmer, referring to a leveraged buyout.
Still, Sycamore has found success turning around retailers that were already buckling under their own debt.
When Sycamore agreed to buy office-supply retailer Staples in 2017, it split the financing into three pieces. It raised debt for the company’s stronger wholesale division and then spun off the US and Canadian retail operations into separate entities. By 2020, Sycamore had already recouped roughly 80% of the equity it had put up as part of the deal.
Walgreens has explored going private previously. In 2019, KKR & Co. approached it about a potential deal that would then have been the largest-ever leveraged buyout. The talks, spearheaded by Pessina, then serving as CEO, eventually fell apart.
Seeking Fixes
Walgreens tapped Tim Wentworth in October of 2023 to help turn the company around. In early 2024, he said the company was “evaluating all strategic options” as it looked to cut costs and increase cash flow.
Wentworth and other executives met with bankers who pitched ideas for improving the company’s financial health, according to people familiar with the deliberations.
Walgreens has long faced questions about why it didn’t pursue the route taken by rival CVS Health Corp., which spent years remaking itself into a health-care conglomerate by acquiring the pharmacy-benefit manager Caremark as well as insurer Aetna.
Walgreens draws more than three-quarters of its revenue from its US pharmacy and retail business, which makes missteps in its stores costly. Putting items in display cases to prevent theft, for example, has had a chilling effect in the checkout line.
“When you lock things up,” Wentworth told investors this month, “you don’t sell as many of them. We’ve kind of proven that pretty conclusively.”
Still, some of Walgreens’ most pressing challenges lie outside its core business. Under previous CEO Rosalind Brewer in 2021, the company launched a new health-care strategy intended to make it “a leading provider of local clinical care services,” according to a filing with regulators.
Brewer doubled down on Pessina’s investment in VillageMD, taking a majority stake and planning to open hundreds more clinics. A year later, Walgreens sunk more money into that project to help facilitate VillageMD’s buyout of Summit Health-CityMD, a medical practice and chain of urgent-care centers.
VillageMD meanwhile was hemorrhaging more cash than Walgreens had anticipated, and it wasn’t clear how much more funding would be needed for it to ultimately become profitable.
“It’s clear it just hasn’t worked out,” Jeff Jonas, a portfolio manager at Gabelli Funds, an investor in Walgreens, said of the original VillageMD investment. “With a fair amount of debt and concerns around their balance sheet, they just can’t fund those losses anymore.”
The moves left Walgreens with a jumble of businesses that burned cash. Brewer abruptly stepped down after fewer than three years as CEO in 2023. The next year, Walgreens wrote down $5.8 billion of its VillageMD investment.
Banker Pitches
Early last year, rumors were swirling at the JPMorgan Healthcare Conference that private equity firms were evaluating whether to buy out Walgreens. At the same time, the company was evaluating moves around some of its individual businesses.
Walgreens hired Centerview Partners to explore a potential sale of Shields Health Solutions, its specialty pharmacy unit. It reversed course several weeks later, people familiar with the matter said.
As the year wore on, Wentworth, who had been CEO of Express Scripts when the pharmacy benefits manager sold itself to insurer Cigna Group in 2018, and John Driscoll, a senior adviser who was previously the president of Walgreens’s health care division, solicited more turnaround ideas from Wall Street.
The executives asked investment bankers from more than half a dozen different firms, including JPMorgan Chase & Co., Goldman Sachs Group Inc., Lazard Inc. and Centerview, to pitch potential moves. Some bankers suggested refinancing debt, selling assets, closing stores and finding a private equity firm to take the company private, among other ideas, the people said.
Spokespeople for JPMorgan, Goldman, Lazard and Centerview declined to comment.
As word got out that Walgreens might be open to a deal, enterprising investment bankers called up their favorite private equity clients and offered to help them finance a buyout, if desired. Several private equity firms lobbed in lowball offers for Walgreens, people familiar with the matter said.
None of those conversations got very far, in part because none were seen as attractive enough for Walgreens.
Walgreens also gauged interest in a potential equity infusion for VillageMD but found no takers, according to the people.
Evaluating Options
By the summer, Walgreens had decided to focus on a turnaround. According to people familiar with the discussions, the goal was to minimize the effect of VillageMD on the rest of the business and potentially refinance debt.
Walgreens has been considering various strategic options for VillageMD, including a sale or restructuring, according to an August filing with the Securities and Exchange Commission.
A sale of VillageMD is seen as the best possible outcome, according to people familiar with the matter, who said Walgreens wants to avoid unsettling suppliers.
Earlier this month, the clouds over Walgreens looked like they might be starting to part, as it reported better-than-expected quarterly pharmacy sales. That led to the biggest single-day gain in Walgreens shares in decades. But it was only weeks later that management would go on to cut the dividend.
--With assistance from Paula Seligson, Jill R. Shah, John Tozzi and Crystal Tse.
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