Recent chatter of a potential Walgreens buyout by private equity firm Sycamore Partners has sent ripples through the healthcare and finance sectors.
While several healthcare analysts are saying a full take private and buyout is improbable, it’s an interesting debate that sheds light on the current state of private equity’s urgency to deploy capital.
The news of talks between the two outfits has sparked some stock market movement according to Nasdaq with Walgreens’ market capitalisation climbing to $9 billion after an 18% surge in its share price following the news. The market cap has since cooled but only slightly.
This is not the first time Walgreens has flirted with private equity. In 2019, the pharmacy giant, valued at over $55 billion at the time, was in talks with private equity stalwart KKR, but the deal fell through.
Sycamore’s involvement and potential strategy
Most analysts see a full acquisition of Walgreens Boots Alliance as highly challenging given the limited number of strategic buyers and the challenges that come with a sprawling global operation. The operational complexity of just Walgreens’ core retail pharmacy business alone, which faces intense competition and margin pressure, would be a herculean task for any private equity firm.
A more likely scenario is carve-out activity of its other businesses as the highly indebted pharmacy retailer looks to pay down debt. Sources suggest that Sycamore is more likely to pursue a sell off/carve-out of Boots, the UK-based pharmacy chain, rather than a full takeover of Walgreens Boots Alliance (Source: Sky News). VillageMD, the doctor-staffed chain of clinics, is also expected to be part of a sell-off, according to one industry source.
This strategy aligns with Sycamore’s track record of focusing on specific business units with turnaround potential. The private equity firm is reportedly lining up financing to acquire Walgreens Boots Alliance. Sources say Bank of America, JP Morgan, and Wells Fargo are among the banks involved in the potential deal.
Valuing the different businesses
In the United States, the median value of enterprise value to earnings before interest, tax, depreciation and amortization (EV/EBITDA) in the health and pharmaceuticals sector as of 2024 was a multiple of approximately 15x (Source: Statista). Companies operating in the healthcare products industries saw the highest valuation multiple with EV/EBITDA ratio of 21.5x in 2024, up from 19.1x in 2023.
Walgreens Boots Alliance sales in fiscal 2024 were $147.7 billion, an increase of 6.2 percent from the year-ago period, and an increase of 5.7 percent on a constant currency basis, reflecting sales growth across all segments.
Losses did take a bite this year. Operating loss in fiscal 2024 was $14.1 billion, an increase of 104.5 percent compared to the year-ago period. Operating loss in the current period reflects a $12.4 billion non-cash impairment charge related to VillageMD goodwill, said the company, which resulted in a $5.8 billion charge attributable to WBA, net of tax and non-controlling interest. Operating loss in the current period also reflects non-cash impairments charges related to certain long-lived assets in the U.S. Retail Pharmacy segment and CareCentrix goodwill. Prior year operating loss reflects a $6.8 billion pre-tax charge for opioid-related claims and litigation and a $431 million non-cash impairment of pharmacy license intangible assets in Boots UK.
Any serious buyout consideration would involve valuing Walgreens’ diverse business segments. Here’s a breakdown:
US retail pharmacy: This core business, while struggling, still generates significant cash flow. However, a PE firm would likely apply a discounted multiple due to its challenges, perhaps 6-8x EBITDA.
International retail pharmacy (Boots): Boots, with its strong presence in the UK, could be valued at a premium, potentially 8-10x EBITDA, reflecting its more stable market position and growth prospects. Walgreens Boots Alliance’s latest twelve months EBITDA is 16.251 billion. Its EBITDA for fiscal years ending August 2020 to 2024 averaged 22.065 billion (Source: Finbox).
Pharmaceutical wholesale (Alliance Healthcare): This higher-margin business could command a higher multiple, possibly 10-12x or higher EBITDA, due to its strong position in the pharmaceutical supply chain. Alliance Healthcare’s latest twelve months ev / ebitda is 14.0x (Source: Finbox)
Healthcare investments: Walgreens has invested in various healthcare businesses, including VillageMD and Shields Health Solutions. These would require separate valuations based on their individual growth trajectories and profitability. For example, Cigna, a major health insurer, has had to write off over half of its substantial investment in VillageMD, a primary care provider. This comes after a decline in VillageMD’s value due to the closure of underperforming clinics by its majority owner, Walgreens.
Cigna originally invested $2.5 billion in VillageMD with the aim of expanding value-based care arrangements, hoping to increase efficiency and share savings with its clients. However, VillageMD’s disappointing growth has led to a $1.8 billion write down for Cigna. This has significantly impacted Cigna’s financial performance, resulting in a net loss of almost $300 million compared to a profit of $1.3 billion during the same period last year (Source: Healthcare Dive).
Why Walgreens is an intriguing target despite the challenges
While a full buyout faces immense hurdles, Walgreens does hold certain appeal for private equity:
Real estate assets: Walgreens possesses a valuable portfolio of real estate, offering potential for sale-leaseback transactions or spin-offs to unlock value.
Healthcare consolidation: The ongoing consolidation trend in the healthcare sector could make Walgreens an attractive platform for PE firms looking to roll up smaller players or expand into adjacent markets.
Digital transformation: There’s potential to leverage technology and data analytics to improve efficiency and enhance customer engagement, an area where private equity could bring expertise and investment.
Looking ahead
A Walgreens buyout remains a long shot. While the challenges of acquiring a behemoth like Walgreens are undeniable, the potential rewards in a consolidating healthcare landscape are equally enticing. Should a deal materialise, expect to see intense competition among private equity players eager to participate in this landmark transaction or a series of carve outs with sizeable ticket sizes.
