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Analysts Skeptical Walgreens Can Pull Off A Go-Private Deal

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Walgreens has hired investment bank Evercore Partners to explore whether a deal can be put together, according to reports

Shares of Walgreens Boots Alliance (WBA) have dropped in morning trading (November 6) as analysts issue their reactions to yesterday’s reports that the drugstore chain has reached out to private equity firms about potentially going private. Following the news, an analyst at Citi called a potential leveraged buyout “somewhat difficult to envision,” while Jefferies said it sees a “slim” chance of an LBO being completed.

WALGREENS CONSIDERS GOING PRIVATE: 

Walgreens Boots Alliance has reached out to private equity firms about a deal that could take it private, according to media reports on Tuesday. Reuters’ Greg Roumeliotis, Mike Spector and Tatiana Bautzer reported that Walgreens has hired investment bank Evercore Partners (EVR) to explore whether a deal can be put together, adding that that sources said “a deal is far from certain.” According to the sources, a leveraged buyout of Walgreens would likely require participation of several private equity firms, adding that Walgreens CEO Stefano Pessina, the company’s largest shareholder with a 16% stake, could roll his equity into the deal to help finance the transaction.

CNBC’s Lauren Hirsch and Angelica LaVito, citing sources, reported that one of the firms looking at a deal is KKR (KKR), which has a history with the retailer. In 2007, KKR bought Alliance Boots in partnership with Stefano Pessina, then the executive chairman of Alliance Boots, and other investors, and stayed on as an investor after Walgreens announced a two-part deal to buy Alliance Boots in 2012.

WALGREENS EXPLORED DIVESTING ASSETS: 

Reuters’ Greg Roumeliotis and Mike Spector also reported that Walgreens has also considered divesting some of its assets, such as its 27% stake in drug wholesaler AmerisourceBergen Corp (ABC), to provide more funding.

WHAT’S NOTABLE: 

Last week, Walgreens warned that it expects adjusted earnings per share in fiscal 2020 to be flat with a range of plus or minus 3% because of the low reimbursement rates for prescription drugs, especially generics, and competition from online retailers. The company has been closing stores and launching partnerships with companies like Kroger (KR) and Jenny Craig in a move to cut costs and boost growth.

ANALYSTS SKEPTICAL ABOUT POTENTIAL LBO: 

Following the reports, several analysts expressed skepticism over the prospects for a potential LBO. The size of a potential deal, structural pressures the business faces, and “years worth of cost reduction and financial engineering” make a leveraged buyout of Walgreens Boots Alliance “somewhat difficult to envision,” Citi analyst Ralph Giacobbe told investors in a research note. However, he added that he wouldn’t be “totally dismissive” of a potential deal following Tuesday’s reports. Based on his analysis, a takeout at about $75 per share could deliver a low-to-mid teens internal rate of return, but he said this would “require a hefty equity check” and underlying assumption of low-single digit EBITDA growth, “which has been hard to come by.” Giacobbe said he sees a lower probability of a leveraged buyout of Walgreens and believes that some sort of a breakup is “potentially more feasible in a strategic alternative scenario.”

Jefferies analyst Brian Tanquilut said he is also skeptical about the prospects of Walgreens Boots Alliance completing the largest leveraged buyout in history given the size of the equity check needed to get a deal done and, “more importantly,” his concerns about long-term company and retail pharmacy fundamentals. While his analysis suggests Walgreens’ “relatively unlevered” balance sheet, “healthy” free cash flow outlook, and large ownership by its CEO make a deal “mathematically feasible,” the analyst told investors in a research note of his own that the prospects of such a transaction getting done are “slim.”

Cowen analyst Charles Ryhee said the idea of Walgreens Boots Alliance going private makes financial sense but he is skeptical the deal could get done as it would represent the largest LBO ever and would likely require multiple financial sponsors as well as its complexity.

PRICE ACTION: 

In morning trading, shares of Walgreens Boots Alliance are down nearly 4% to $58.85.

Originally Posted on November 6, 2019 – Analysts Skeptical Walgreens Can Pull Off A Go-Private Deal

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