This week, the retail industry has been buzzing over the news of pharmaceutical retailer Walgreens’ potential deal with private equity firm Sycamore Partners. 

An excitement which has led to shares of the second-largest US pharmacy chain operator surging over 18 per cent following this update. 

If talks prove fruitful, this could be Sycamore Partners largest deal considering Walgreens’ market capitalisation reached $9 billion this Tuesday. 

However, this is not the pharmaceutical chain’s first attempt at finalising a private acquisition deal.

In 2019, private equity firm KKR made a $70 billion offer to buy Walgreens, back when the company was valued at over $55 billion.

However, the deal was never finalised, partially due to waning private-equity appetite since high-profile flops, including that of Toys “R” Us,  made financing such transactions much more difficult.

Since 2019, Walgreens’ financial standing has only worsened in the face of inflation and low reimbursement rates for filing prescriptions. 

As of August 31, the retailer is facing long-term debt totaling over $8.04 billion.  

In September 2023, Walgreens attempted to shake things up with a change in management. Shortly after the retailer’s previous CEO Rosalind Brewer stepped down, healthcare industry veteran Tim Wentworth took her place and announced drastic measures such as a $1 billion cost-cutting plan and the closure of 1200 stores over the next three years.

However, it appeared that these changes were largely for naught as the company’s stocks have fallen over 60 per cent as of this Monday. 

What an acquisition deal may entail for Walgreen’s future 

As Saunders explained to Inside Retail, “Walgreens has been in a tailspin for a long period of time, with management unwilling or unable to grab the controls and level off the business. With few prospects for engineering a rapid elevation of the company, a sale to private equity would be an elegant solution for extracting value for investors.”

“If the deal goes through,” Saunders elaborated, “Sycamore Partners would acquire a sprawling business empire that they could, with some effort, fashion into a more disciplined operation. They would also have the possibility of selling off parts of the business, such as Boots, to maximise their return.”

However, the GlobalData executive warned that the scale of the task should not be underestimated. 

“Walgreens is a big company with big problems, and this would be a longer-term investment rather than a way to make a quick buck,” Saunders pointed out. 

While cuts are realistically on the table for Walgreens in the coming months, the pathway to growth will be very challenging considering how the healthcare, pharmacy and retail sides of the business all have inherent problems that are not easily soluble.

What is going on with the pharmaceutical retail industry

Walgreens isn’t the only pharmaceutical player facing issues within the retail industry.

Medication retailers including Rite Aid and CVS have been experiencing their own fair share of troubles, with the former announcing Chapter 11 bankruptcy in October 2023 and the latter shutting down over 300 stores in the past year. 

Saunders previously identified three main issues at play in the drugstore space including the competition in the convenience sector, the failure to invest in the retail offer and the rise of online shopping.

The GlobalData executive explained that “it used to be the case that drugstores were the destination for quick shops, top-up missions, and everyday essentials. With the rise of online and other retailers like Dollar General in rural areas, this is no longer the case.”

These issues are further exacerbated by an environment in which fewer people are willing to pay the more expensive prices drugstores often charge. Not to mention the various legal settlements related to the opioid crisis issued against companies like Rite Aid, Walgreens, and CVS, which have cost these chains billions of dollars, drastically affecting their ability to operate at a financial gain. 

With Walgreen’s diminished valuation, especially in light of where the retailer stood just five years ago, Saunders theorised it may be more than than it’s worth for Sycarmore Partners to acquire Walgreens. 

“The decision [Sycamore] need to make is whether there is enough fuel left in the tank of Walgreens to allow it to be piloted on a course to success,” Saunders concluded.