Shares of Walgreens Boots Alliance (NASDAQ: WBA) soared 20% on Tuesday, as of 2:35 p.m. ET.
The beaten-down retail pharmacy rallied on rumors it might get bought out by a private equity firm. Usually, buyouts happen at a premium to the market stock price, and with shares down 63% on the year and 90% from their highs, there was ample room for a premium over yesterday’s closing stock price.
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Today, The Wall Street Journal reported that private equity firm Sycamore Partners has been in talks with Walgreens regarding a potential buyout. The WSJ reported that according to “people familiar with the matter,” talks could be consummated by the early part of next year.
Walgreens is much smaller than the $100 billion market cap reached in 2015, with its value falling to just $7.4 billion yesterday but vaulting to over $9 billion as of this writing. That would make it a large deal for Sycamore, but also doable, as private equity has attracted more investor money in recent years. That being said, Walgreens is also burdened by about $8 billion in net debt, not counting operating leases.
Walgreens has been attempting a turnaround under CEO Tim Wentworth, who comes from the pharmacy benefit manager (PBM) industry, whose tough negotiations on drug reimbursement has been a source of Walgreens’ depleted margins.
While Wentworth recently said negotiations with PBMs to get better reimbursement rates are going well, other tech-savvy retailers and e-commerce players are also moving quickly to get into same-day pharmacy delivery services. That additional threat may require more investment from Walgreens to compete, and spending amid depressed revenue might scare public market investors. Apparently, Sycamore thinks it can help Walgreens turn itself around away from the prying eyes of the market.
Today’s bounce indicates investors think a deal is likely, but further gains from here may be difficult. Walgreens is down a lot from highs, but also has great challenges that will probably limit the amount Sycamore is willing to pay. Meanwhile, if a deal doesn’t occur, expect the stock to revisit its recent lows.
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