Walgreens Boots Alliance Inc. (WBA) shares took a wild ride this week, plummeting 3.26% to $10.08 in pre-market trading on Wednesday, following a remarkable 20% surge on Tuesday. This volatility stems from swirling speculation surrounding a potential private equity takeover by Sycamore Partners, a deal that has ignited a heated debate among market analysts and experts.
The initial surge was fueled by Gary Black, Managing Partner at The Future Fund LLC, who presented a compelling valuation argument for a potential $15 per share offer. Black’s analysis points to Walgreens’ projected fiscal year 2025 adjusted earnings per share (EPS) of $1.40 to $1.80, as outlined during their recent earnings call. At the current stock price, this translates to a price-to-earnings ratio of a mere 6.7 times the projected 2025 EPS, a figure he highlighted alongside the stock’s attractive 9.3% dividend yield. His back-of-the-envelope calculations suggested a potential $15/share bid ($13 billion total) could be feasible, even under a conservative 6x EV/EBITDA deal price.
However, not everyone shares Black’s optimism. CNBC’s Jim Cramer injected a note of caution, expressing skepticism about the deal’s complexity and potential challenges. Cramer’s tweet cautioned investors against overpaying, emphasizing the difficulties even a seasoned private equity firm like Sycamore might face in turning around Walgreens’ fortunes. He noted, “Wow, Walgreen’s too tough to turn even for the great Wentworth whom I revere. Don’t overpay for this one…”
The intense interest in a potential Walgreens acquisition underscores the company’s significant decline from its December 2015 peak of $85 per share and a $100 billion market valuation. The pharmacy chain, currently valued at approximately $9 billion, has witnessed an alarming 82% value erosion since 2020, largely attributed to increased competition from online pharmacies and the behemoth, Amazon.com Inc.
Adding further complexity to the potential takeover, The Wall Street Journal reported that Sycamore Partners, known for its 2017 acquisition of Staples for $7 billion, may seek additional partners or divest certain Walgreens assets to facilitate the deal. This strategic approach contrasts sharply with KKR’s unsuccessful 2019 bid of roughly $70 billion, which was rejected by Walgreens’ board as insufficient.
Walgreens’ recent financial performance further fuels the discussion. The company’s most recent quarterly results revealed a 41% drop in adjusted earnings despite revenue growth, forcing the company to announce plans to close 1,200 stores over the next three years. This highlights the significant operational challenges Walgreens faces and the potential hurdles a potential acquirer like Sycamore Partners would need to overcome.
The ongoing saga of Walgreens and Sycamore Partners’ potential merger presents a fascinating case study in the complexities of large-scale acquisitions in a rapidly evolving retail landscape. The final outcome remains uncertain, but the market’s volatile reaction showcases the considerable interest and potential implications for both companies and the broader market.
