Table of Contents
A new era in the storied history of Walgreens Boots Alliance has begun with the agreement to sell the company to Sycamore Partners, a private equity firm that until now was best known for its acquisition of the Staples office supplies chain in 2017. Valued at as much as $23.7 billion, the deal is intended to accelerate the pharmacy operator’s ongoing turnaround efforts. As a privately owned company, WBA will escape the scrutiny of Wall Street and be able to make tough decisions that yield long-term benefits.
“We are focused on making health care delivery more effective, convenient and affordable as we navigate the challenges of a rapidly evolving pharmacy industry and an increasingly complex and competitive retail landscape,” said Tim Wentworth, WBA’s chief executive officer. “We believe this agreement provides shareholders premium cash value, with the ability to benefit from additional value creation.”
That’s good news for WBA’s stockholders, who have seen the company’s valuation fall from more than $100 billion a decade ago to less than a tenth of that today. When the deal is finalized, they will receive $11.45 per share, or some $10 billion, with the potential of realizing an additional $3 per share through the planned monetization of WBA’s stake in VillageMD. (The transaction with Sycamore Partners also includes net debt, capital leases and other items.)
WBA executive chairman Stefano Pessina, who owns 17% of the company’s stock, supports the deal. If all goes according to plan, he has committed to reinvest cash proceeds from the transaction into Sycamore Partners.
Like all U.S. drug chains, WBA has struggled in recent years due to a conjunction of market forces. Pharmacy benefits managers continue to squeeze profit margins on prescription drugs — a category that accounts for almost 80% of volume at Walgreens stores. At the same time, front-end foot traffic and sales have become hard to come by in the face of fierce competition from such retailers as Walmart, Costco and Dollar General, as well as Amazon and other e-commerce companies.
Wentworth (who joined WBA in October 2023) and his team have responded aggressively. The company is in the process of closing more than 1,200 underperforming locations, sharpening operational efficiency, reducing costs and enhancing customer experience. The key to WBA’s turnaround, however, will be finding ways to make the pharmacy business more profitable.
During an earnings call with financial analysts last June, Wentworth said, “The current pharmacy model is not sustainable.” Spurred by that realization, WBA is negotiating with third-party payers to establish new reimbursement paradigms that stress value-based care and working to expand the range of services offered by pharmacists. Securing those changes will go a long way toward ensuring that WBA maintains a critical role in the retail health care ecosystem.
Structural changes take time, particularly when they involve other entities that may have different financial incentives than retail pharmacies. It will be interesting to see how much patience Sycamore Partners has as WBA strives to reinvigorate its core business. In the meantime, several published reports have indicated that Sycamore may break up the company — which operates approximately 12,500 stores in the U.S., Europe and Latin America. Within that scenario, Walgreens and Boots, the largest drug chain in the United Kingdom, would operate independently, as would WBA’s specialty pharmacy business, which handles medications and services for patients with such chronic, rare and complex conditions as cancer, cystic fibrosis and Crohn’s disease. In terms of dollar volume, specialty drugs already account for more than half of the total pharmacy market.
Referencing the longevity of Walgreens and Boots (the former is 125 years old, the latter 175), Sycamore Partners managing director Stefan Kaluzny expressed confidence in WBA’s pharmacy-led model. Going forward, the specialty business is likely to prove more lucrative than the traditional pharmacy model that has sustained the business for so long.
As Wentworth knows, the road ahead will be fraught with difficulty: WBA and other drug chains face stiff headwinds. Much will depend on the outcome of the drive to alter the reimbursement model, including convincing Congress to enact meaningful PBM reform. If that happens and Sycamore Partners adopts a long-term view in its expectations for return on investment, WBA should succeed in executing its turnaround plan and reclaim its status as the company that is synonymous with retail pharmacy in the mind of consumers and patients across the U.S.
