Could a private equity deal be the end of Walgreens?

A major changing of the guard is happening at one of America's most prominent drugstore chains. Walgreens announced on March 6 that it was being acquired by private equity firm Sycamore Partners. The deal represents a massive shift in strategy for a company that has been on the decline for several years, and business analysts are wondering whether this could be Walgreens' last gasp.

The deal was valued at about $10 billion, but it could be worth up to $23.7 billion with debt, settlements and other financial obligations, according to a press release. This is a far cry from the $100 billion Walgreens was worth a decade ago. The transaction "reflects our confidence in [Walgreens'] pharmacy-led model and essential role in driving better outcomes for patients, customers and communities," said Stefan Kaluzny, the managing director of Sycamore Partners. The jury is still out on whether the deal will be able to turn around Walgreens' misfortunes.

What did the commentators say?

Walgreens has been "attempting a financial turnaround for years, and now it says it's found a new path to finish it," said Chris Isidore at CNN. But if "history is any guide, its path is more likely to lead to its eventual demise than long-term success." Walgreens has been publicly traded for more than 100 years, and "less than a decade ago it was America's largest drugstore chain."

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The chain peaked in 2018 when it replaced General Electric in the Dow Jones Industrial Average. But its "shares have lost 83% of their value since that day, with a 71% plunge coming in just the last four years," said Isidore. Sycamore Partners has claimed it can get things on the right track, but "retail's graveyard is full of the bones of many once-dominant retailers who closed up shop after being bought by private equity firms."

The Walgreens deal is the "sad coda to what was once one of the most significant success stories," said Crain's Chicago Business' editorial board. But the "rise of digital competitors like Amazon for front-of-store merchandise and even prescriptions was well underway" in the mid-2010s, and "brick-and-mortar competition in the form of CVS and Walmart was also eating away at market share." The company also went through a "failed pivot into the complex and costly business of delivering health care services directly to patients."

The deal itself is "wild," as its total value is "around seven times the business' expected earnings before interest, tax, depreciation and amortization for the current financial year," said Chris Hughes at Bloomberg. It is a "jumbo undertaking" that "confirms just how much the financing markets have been re-energized by the private credit industry." And the private equity company, not Walgreens, has "taken on the colossal operational challenge of turning around this brick-and-mortar business."

What next?

The ultimate victor from the deal may be neither the Walgreens executives nor Sycamore, but Walgreens bondholders. It has been reported that Walgreens shareholders are being offered a 63-cent bonus if they sell their equity, and "some of the company's creditors could be in line for a similar bonanza," said the Financial Times.

Investors and lawyers are now analyzing the company's debts, and if "Walgreens' credit rating falls to 'junk' status, bondholders could force the company to buy back the bonds at par," said the Times. The company's shareholders will "probably be grateful to see a deal go through at all — even if it's a group of bondholders who take home the sweetest premium."