U.S. pharmacy chain giant Walgreens rose over 23%, reports indicate it is in talks with private equity firms for a sale

On December 10th, Tuesday, Eastern Time, according to The Wall Street Journal, American pharmacy chain Walgreens Boots Alliance (referred to as WBA) is in talks with private equity firm Sycamore Partners regarding a potential sale. If the deal is successful, this retail giant with over 120 years of history will delist from the public market. Insiders revealed that both parties are expected to reach an agreement early next year, unless negotiations break down.

As a result of this news, WBA's stock price rose by 5.9%, triggering a trading halt. After trading resumed, the increase quickly expanded to 23%.

However, in recent years, the company's stock price has continued to decline, with its market value shrinking from a peak of over $100 billion in 2015 to currently less than $10 billion, having dropped nearly 70% year-to-date. WBA's predicament reflects the immense pressure faced by the traditional retail pharmacy industry in the United States. With the rise of e-commerce and online healthcare services, as well as intensified competition in prescription drug pricing, the operating environment for traditional chain pharmacies like WBA has become increasingly challenging.

WBA Faces Transformation Challenges

WBA's history dates back to the late 19th century. After more than 120 years of development, the company has become one of the most representative retailers in the United States. Today, WBA operates over 12,000 stores across the United States, Latin America, and Europe, covering communities nationwide and becoming an indispensable part of people's lives.

However, in recent years, WBA has failed to achieve the expected success in responding to industry changes. To cope with competitive pressures, WBA has heavily invested in its clinic business, hoping to find new growth points through transformation, but this strategy has not effectively curbed the decline in performance.

WBA's predicament is not an isolated case. In recent years, many retail pharmacies have faced similar pressures, particularly due to intensified competition in drug pricing, leading to a general decline in company profit margins. This predicament stems from the pressure on drug prices from pharmacy benefit management companies, which negotiate drug prices on behalf of insurance companies and employers. At the same time, the rise of e-commerce platforms like Amazon has squeezed the retail business of traditional pharmacies.

In the face of these challenges, WBA's competitor CVS Health has diversified its business through the acquisition of pharmacy benefit management companies and insurance companies, while WBA remains primarily focused on retail pharmacy operations.

In 2012, WBA spent over $6 billion to acquire nearly half of European pharmacy giant Alliance Boots, aiming to expand into overseas markets. In 2015, the company completed the acquisition of the remaining shares of Alliance Boots. However, this transaction did not go as smoothly as expected. After the acquisition, the financial pressure on WBA's core pharmacy business forced the company to consider other options, including the potential sale of Boots.

In October 2023, Tim Wentworth from the PBM industry took over as CEO of WBA, aiming to turn the company around. The company announced plans to close a large number of underperforming stores, improve overall operational efficiency, and refocus on its core business by reducing its stake in primary care provider VillageMD

Is a New Merger and Acquisition Drama in the Retail Industry About to Unfold?

Against this backdrop, as the second-largest chain pharmacy in the United States, WBA has long been viewed as a potential target for private equity acquisition, but its massive scale seems to deter many potential buyers.

Looking back at history, in 2019, private equity giant KKR made an acquisition offer of about $70 billion for WBA. At that time, WBA's market capitalization exceeded $50 billion, and if the deal had been successful, it would have become one of the largest privatization transactions in history. However, the deal ultimately did not materialize.

In fact, in recent years, private equity interest in retail acquisitions has noticeably cooled. This is mainly due to the failures of high-profile mergers and acquisitions, such as Toys "R" Us, which significantly increased the financing difficulties for such transactions. In the past few years, only a few larger retailers have been acquired by private equity firms.

For Sycamore Partners, acquiring WBA would be the largest transaction in its history. Headquartered in New York, Sycamore focuses on investments in the retail and consumer goods sectors and has participated in several smaller transactions in recent years.

For example, in 2017, Sycamore acquired office supply retailer Staples for nearly $7 billion, and in 2022, it participated in the bidding for department store Kohl's. In September 2023, Sycamore announced the acquisition of the restaurant chain Playa Bowls. Additionally, Sycamore's current portfolio includes several clothing brands, such as Ann Taylor Loft and Aéropostale, as well as the department store Belk.

If this acquisition is successful, it will further expand Sycamore's footprint in the retail industry. Moreover, Sycamore may restructure WBA, sell off parts of the business, or bring in partners to co-manage operations to achieve higher investment returns