Shares of Walgreens Boots Alliance WBA have gained more than 5% since the news of its receipt of an acquisition proposal surfaced. The buzz is around private equity firm KKR & Co.’s $70-billion bid to buy the world’s first pharmacy-led, health and wellbeing enterprise, currently with a market cap of $55.56 billion. If the headline holds true and the deal eventually matures, this is going to be the largest private equity buyout on record.
Walgreens Boots’ stock has been rising over the past two days on above average volume.
Bloomberg was the first to report on this potential deal citing some undisclosed source, which claimed that KKR under a private discussion already formally approached Walgreens Boots with its sell-off offer.
WBA in Investors’ Focus
Walgreens Boots’ shares have shed 22.5% of value over the past year compared with the industry’s 13.4% decline. Persistent decline in its stock price has made this Zacks Rank #4 (Sell) player significantly cheaper and a rather lucrative target for investors.
In this regard, per the latest annual filing of Walgreens Boots, the company currently has more than 18,7501 stores across 111 countries. It runs one of the largest global pharmaceutical wholesale and distribution networks with above 4001 distribution centers dispensing services to more than 240,0002 pharmacies, doctors, health centers and hospitals each year in 201 plus countries.
Sell-Off: A Wise Decision?
Shares of the company have been declining since non-healthcare leaders like Amazon AMZN, Berkshire Hathaway and JP Morgan JPM started floating major healthcare ventures. This, in turn, escalates price competition for Walgreens Boots with the emerging online peers eating into its pharmacy customers.
Under these circumstances, Walgreens Boots’ rival CVS Health CVS adopted the growth-by-acquisition policy to defy all odds. It expanded through vertical integration by acquiring the health insurance giant Aetna.
Meanwhile, Walgreens Boots focused on its front-end stores and announced partnerships with companies like Kroger KR and FedEx FDX. Despite these efforts, according to a Bloomberg report, “It’s the second-worst performer on the Dow this year”.
Report suggests that Walgreens Boots responded to online competitors’ pressure with a plan to cut $1.8 billion annually in expenses by 2022. It also closed down stores, disclosing plans in August to shut 200 U.S. locations alongside a previously announced 750. This apart, in October, the company declared a massive lay-off.
Although the market sentiment is quite upbeat about this prospective acquisition deal, a number of analysts are pretty unsure of any effectiveness of the company’s approach to privatization. According to a research note by Jonathan Palmer of Bloomberg Intelligence, “A leveraged buyout would ‘do little’ to solve Walgreens Boots’ structural issues”.
Going by Andrew Barry’s report, published in Barron’s, J.P. Morgan analyst Lisa Gill stated that in its effort to go private, Walgreens Boots would be able to work on its initiatives outside the vigilance of public shareholders. However, at the same time, this private deal is going to restrict the company’s financial flexibility with less free cash available for investment in the business. “Given the challenges in the pharmacy business, a highly leveraged Walgreens Boots could be at a disadvantage relative to CVS and others,” she said.
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