WALGREENS CONSIDERING GOING PRIVATE; MAY SOMEONE ELSE BUY THEM FIRST?
Could Walgreens be strategically signaling it is up for sale to the highest bidder by presumably going through the motions of taking itself private?
Walgreens partnerships key considerations:
- Boots Alliance ( WBA ) is reportedly consulting KKR, a leading global private equity firm, about its options to go private
- With an estimated market capitalization of $50 to $60 billion it would be one of the largest public to private deals in history
- The current debt load of Walgreens is about $15 billion and is a pivotal cost element undertaking such a deal
- If KKR were to orchestrate the public to private deal with Walgreens, it would likely enlist additional financial partners such as other private equity firms and investment bankers
Walgreens would be a blockbuster private equity play
Reportedly Walgreens ( NASDAQ: WBA ) is exploring options to take itself private. Officially known as Walgreens Boots Alliance, the global pharmacy and consumer healthcare leader going private would create one of the largest leveraged buyouts in history.
Walgreens Boots Alliance is a consumer retail, pharmacy, healthcare services, supply chain leader
Taking Walgreens private may involve an estimated range of $50 billion to $60 billion to execute the transaction. Most of the company’s global scope and scale are overlooked by consumers and even those in the healthcare sector:
- Founded in 1901, their present CEO, billionaire Stefano Pessina, owns about 16% of the company
- Daily, Walgreens interacts with over 8 million customers in stores and online
- They operate more than 9,000 stores in the United States and more than 13,000 units worldwide in 11 countries.
- Walgreens owns 26% of AmerisourceBergen; one of the world’s largest drug wholesalers
- They are a minority shareowner of Option Care Health, the largest home infusion and alternate site care provider in the nation servicing patients in all 50 states and administers over 2 million doses of various IV therapies per month; Option Care Health ( NASDAQ: BIOS ) was formed through the merger of Option Care and BioScrip in 2019
- The company has a pilot venture underway with grocery retail giant Kroger involving Walgreens health and beauty brands being sold in Kroger stores and Walgreens selling select Kroger grocery goods in their stores plus supporting Kroger online ordering consumer pickup services at participating stores
- Microsoft and Walgreens are collaborating on a suite of chronic disease management and patient engagement applications plus a portfolio of connected Internet of Things (IoT) devices for nonacute chronic care management, delivered by Microsoft’s cloud, AI and IoT technologies
- About 78% of the population in the United States lives within 5 miles of a Walgreens store or a Walgreens-owned Rite Aid or Duane Reed store.
- Walgreens has an active partnership with Blue Cross Blue Shield affiliated prescription benefit manager Prime Therapeutics known as AllianceRx Walgreens Prime)
Significant cost reduction measures at Walgreens are boosting profits and providing funds for reinvestment in the company
The company recently announced a corporate cost-cutting initiative with a goal of $1.8 billion in expense reduction by 2022 -an amount that was increased from an original objective of $1.5 billion.
One portion of it consists of closing about 40% of its in-store clinics as it initiates new strategies to boost profitability. The clinics selected to close are those which are operated by Walgreens. The remaining store-based clinics operated through partnerships with healthcare provider organizations such as hospitals or healthcare systems will remain open. About 150 clinics are impacted by this and slated to be closed by the end of the year. Over 200 clinics will continue to run through the existing healthcare provider partnerships.
This announcement triggered hospitals, health systems and other healthcare provider organizations located near the units with clinics designated to be closed to inquire about taking over those operations. TriHealth, a 5-hospital healthcare system in Cincinnati, Ohio has already moved forward for the opportunity to operate 7 of the in-store Walgreens clinics in their area.
Investment required for a Walgreens Boots Alliance private equity deal will likely involve several financial players
The estimated $50 billion to $60 billion required to take Walgreens private is quite a large sum. It is likely more than one investment firm would be needed not just for the funding but also to spread the risk. A single private equity firm or investment bank would likely not want to sink $50 billion to $60 billion into a single asset as risk is always a factor no matter how stable an asset is and as new lucrative opportunities present themselves they would want funding available for them.
Private equity firm KKR already has a stake in the company from past deals with the organization. A key consideration in taking the company private is managing its current debt load which is about $15 billion. Reportedly Walgreens is working with investment banking advisement firm Evercore to assess what is involved to proceed further.
Does the prospect of Walgreens going private trigger someone else to acquire them?
Based on its many attributes, Walgreens is an extraordinarily valuable company and potentially a target for another type of ownership change. It generates over $136 billion in annual sales. Conceivably another company could make a run at acquiring Walgreens before they went private. Key considerations for another retailer to buy Walgreens would include the financing of the deal itself, integrating the new organization and assuring profitability while servicing their existing debt and the new debt of the deal — which would have the added burden of Walgreens’ existing $17 billion debt load.
The opportunity to acquire a company like Walgreens does not come around often; it is a solid organization with established brand and earnings credentials
Despite Walgreens’ debt load and the scale of a deal, their consumer retail and pharmacy business savvy plus technology and logistics leadership are undeniably platinum assets not to mention excellent store locations and large share ownership of AmerisourceBergen plus its partnership with Prime Therapeutics.
The Walgreens brand has a robust identity and is a formidable competitor in pharmacy and the product categories merchandised in chain drugstores. These include health and beauty, cards and stationery, over-the-counter medications, numerous kitchen, bath and household cleaning products plus beverages, convenience foods and seasonal items.
On the surface, there are some big retail and online players to consider when thinking about who could be capable of acquiring Walgreens
Mergers and acquisitions are rampant across the healthcare sector in numerous product, service and patient care categories. Walgreens makes for an interesting target as it is top tier in terms of quality, uniqueness and scale; many corporations would love to have them as an operating unit. Once the fiscal and organizational details are looked at more closely, only a small number of companies are viable contenders to orchestrate an acquisition of Walgreens:
It is very unlikely their largest retail pharmacy rival, CVS, to even consider acquiring them based on antitrust issues and their recent acquisition of insurance company Aetna. It is evident through the acquisition of Aetna CVS wanted to diversify its business model beyond pharmacy services and bolster its ability to generate more business through healthcare-related enterprises like medical and prescription benefit insurance.
Amazon is a long shot but several factors must be considered. They generate about $233 billion in annual sales. They are not acquisition or risk-averse. Walgreens would give them direct penetration into numerous retail markets and access to millions of everyday consumers and prescription drug customers. Amazon has already stepped out of its online-only business model through its acquisition of Whole Foods in 2017 for $13.4 billion and opening of Amazon Go stores.
Walgreens stores give them a strategic storefront presence without having to commit to larger retail footprints like grocery outlets or mass merchandisers. The Walgreens store concept is based on walk-in consumer convenience as are Amazon Go stores.
Amazon is seeking to widen its business in healthcare and fortify its PillPack unit. It would immediately provide them with enormous leverage in dealing with SureScripts and the patient data access issues they have challenged them with. A Walgreens deal would be gargantuan even for them. Even with its steep financial commitments, an Amazon acquisition of Walgreens offers enough potential opportunity for its healthcare and other commercial/consumer ventures for at the very least mildly consider.
Kroger is currently collaborating with Walgreens on a few initiatives. Kroger recently announced it was moving forward with cost-cutting initiatives while launching a new branding theme, “Fresh For Everyone”. The combination of Kroger, the nation’s largest grocery chain, and Walgreens would be a formidable tandem. Kroger is the world’s third-largest retailer with over $119 billion in yearly sales; they trail only Walmart and Costco Wholesale.
Unbeknownst to many, Kroger not only operates stores under the “Kroger” name but more than 10 others as well including FredMeyer, King Soopers Mariano’s, Payless, Pick n’ Save and Roundy’s. Their combination is viable; it would reasonably diversify and complement their existing business models and customer bases.
Netherlands-based Ahold could be initially considered as a contender. Ahold operates stores in numerous global markets as well as the United States. Their annual sales are roughly $73 billion. Picking up Walgreens would widen their business model and add revenue streams to their bottom line in the U.S. and Europe but financially it’s out of their reach.
Grocery chain Albertsons generates about $60 billion in annual sales. Their acquisition of Walgreens would be a long stretch although enticing as to enable them to broaden their organization beyond the grocery sector and give them exposure to more geographic markets. The financial scale of the deal even without the $17 billion debt load is not something Albertsons can consider in their plans.
Costco generates about $142 billion in yearly sales. Acquiring Walgreens would indeed diversify their business model which could be a primary reason for them not to explore a deal outside of the scope of where they have had such great success. It would indeed provide them the opportunity to augment their overall presence in consumer health and pharmacy sectors. Such an extreme departure from their winning commercial formula has its pros and cons. Costco could have the fiscal horsepower to undertake such a deal but likely not consider the rewards to be worth the risks.
Target Corporation generates about $75 billion in annual sales. Buying Walgreens would be a significant hurdle for them financially and involve another sticking point directly aligned with Walgreens’ core pharmacy business. Target’s pharmacy units within their stores are owned/operated by CVS. If Target were to acquire Walgreens, the CVS pharmacy ownership arrangement would someway have to be undone. Based on financial hurdles and the tie-up with CVS pharmacy, Target Corporation is not going to entertain an acquisition of Walgreens.
Walmart is an interesting and viable prospect for numerous reasons. Several former Walgreens pharmacy executive leaders are presently working at Walmart headquarters within the U.S. pharmacy business unit. Walmart generates over $514 billion in annual sales. Walmart and Walgreens have been dueling over consumer and pharmacy sales for years despite their differing big box versus chain drugstore business models. Walmart has experimented with smaller footprint stores to efficiently and profitably gain access to more retail customers. Buying Walgreens would give them that access plus bolster their consumer health and pharmacy business.
Undoubtedly antitrust concerns would come into play for a Walmart and Walgreens deal. There may be enough differentiation based on the pairs’ big store/mass merchandiser and convenience retail/pharmacy organizations that regulators would approve the combination. The leverage they could put on manufacturers of consumer goods, pharmaceuticals, as well as service vendors, would be unmatched while fortifying their competitive position against other retailers plus online rival Amazon.
Moving forward, Walgreens is a formidable company on its own or as an operating unit of another organization
Based on this lineup, Amazon, Kroger and Walmart are potential suitors; Costco a runner up based on an assumable reluctance to tamper with its unique and successful business model. There is a lot for Walgreens, its competitors, investors and potential suitors to consider based on the opportunity as well as risk.
The attractiveness of a present-day opportunity to acquire Walgreens is great, the long-term commitments and challenges still have to be considered. Jettisoning the company’s stake in AmerisourceBergen and/or Option Care Health could be a pre- or post-deal task to streamline operations and generate cash. A takeover by public or private entities requires the new owner to undertake swift, strategic action to boost Walgreens’ profitability without disrupting day-to-day operations.
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