For Walgreens, Going Private Changes the Venue, Not the Problem

(Bloomberg) -- The public markets have not been kind to Walgreens Boots Alliance Inc.

The company is the biggest standalone drugstore chain in the U.S., and has doubled down on a brick-and-mortar strategy even as online competitors proliferate, trying to steal its best pharmacy customers while slowly chipping away at its front-of-store sales as well. It's the second-worst performer on the Dow this year.

On Tuesday, Bloomberg reported that Walgreens was reviewing a potential deal to team up with private equity in what would be the largest leveraged buyout in history. Chief Executive Officer Stefano Pessina is the company's largest holder, with 16% of the stock, which could help ease the about $50 billion valuation company's passage from public to private.

While a private equity deal might give Walgreens time and flexibility, it won't relieve the numerous external pressures that it and other pharmacy chains are facing. There are too many pharmacies in the U.S. competing for the same customers. In the retail aisles, they're being squeezed e-commerce companies like Amazon.com Inc. on one end and big box stores like Target Corp. on the other.

At the back of the store, startups are coming for the prescription drug business -- offering delivery services, convenient pill packaging and eyeing the $333 billion U.S. prescription market as ripe for disruption. New generic drug launches, one source of pharmacy profits, aren't as frequent as they used to be. And brand-drug price hikes, another source of profits, aren't increasing as fast as they used to either, amid public outcry over soaring drug costs.

“The retail pharmacy market is on the verge of an intense shakeout,” said Adam Fein, CEO of Drug Channels Institute. “I don't see how a private equity firm is going to make money with a transaction like this.”

Out of the Spotlight

What going private would give Walgreens is time. Walgreens operates more than 9,000 pharmacies around the U.S. It has responded to the pressure with a plan to cut $1.8 billion a year in expenses by 2022. It has also closed stores, disclosing plans in August to shut 200 U.S. locations on top of a previously announced 750.

The company has announced partnerships, including with grocery company Kroger Co., delivery service FedEx Corp. and weight-loss company Jenny Craig. Under a deal with medical-testing company Laboratory Corporation of America Holdings, customers will be able to get blood and other lab tests in at least 600 Walgreens stores in the next few years.

A leveraged buyout would “do little” to solve Walgreens' structural issues, wrote Jonathan Palmer, an analyst at Bloomberg Intelligence, in a research note. But results from its store transformations will take time -- potentially many years, according to some analysts. A private equity deal would allow Walgreens to restructure and transform its stores behind the scenes, providing time for it to see what works and what doesn't.

For private equity firms awash in investor money that needs to find a place to go, Walgreens is an potentially attractive distressed asset. It is consistently profitable, but its shares are down roughly 26% in the last 12 months. And the drugstore business, despite its problems, hasn't been hit as hard by the e-commerce revolution as many other retailers.

The company's share drop may have created an opening, with stock investors looking for a way out, and private equity looking for an attractive valuation to come in at. This year, the shares have declined to levels not seen since 2013.

But there's skepticism about a go-private deal actually happening, given the huge size. At a Reuters event on Wednesday, Blackstone Group Inc. Chief Executive Officer Stephen Schwarzman said that mega-deals in the Walgreens size range aren't out of the question, but would depend on the circumstances.

“Is it possible to do that? It might be possible. It's a huge stretch doing things over $50 billion,” he said, choosing his words slowly and carefully. “This is straining the system.”

And in recent years, Walgreens has been said to be in talks about other major transactions that haven't come to pass. About a year ago the Wall Street Journal reported that Walgreens and Humana Inc. were in preliminary discussions to take equity stakes in each other. In early 2018, there were reports that Walgreens was in talks to take over drug wholesaler AmerisourceBergen Corp.; it owned about 26% of the wholesaler's shares at the time. Neither materialized.

There seem to be doubts among investors that this will one will, either: After rising as much as 8.1% Tuesday after the news reports, Walgreens shares closed the day up a more modest 2.6%. On Wednesday, the shares were down 3.2% at 1:10 p.m. in New York, giving up all of those gains.

“Many companies have exploratory conversations, often nothing transpires,” said Eric Coldwell, an analyst with Robert W. Baird, in a note to clients on Tuesday. “The Street seems to be fading this almost fast as it materialized.”

To contact the reporter on this story: Robert Langreth in New York at rlangreth@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Cécile Daurat

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