Walgreens: Shares Surge as Reported Talks of Private Equity Buyout Excite Investors

Key Morningstar Metrics for Walgreens Boots Alliance

• Fair Value Estimate: $20.00
• Morningstar Rating: 5 stars
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

What We Thought of Walgreens Boots Alliance’s Earnings

The Wall Street Journal reported on Dec. 10 that Walgreens Boots Alliance WBA is discussing selling itself to private equity firm Sycamore Partners. Walgreens shares have struggled, with the stock down about 80% over the past five years, and the firm’s market capitalization now falls below $10 billion. The announcement sent shares surging about 20% at the time of writing, and we expect further stock volatility with more updates.

Even with Walgreens’ depressed valuation, a deal this size is outside Sycamore’s usual scope. The firm specializes in consumer- and retail-related investments. Its recent deals include national superfruit bowl franchise Playa Bowls, KnitWell (a portfolio of notable fashion brands, including Ann Taylor and Chico’s), and Canada-based home improvement retailer Rona. This seems like the first time Sycamore has expressed interest in a healthcare asset, and it’d be the firm’s largest deal over the past decade. Given the recency of the announcement and the uncertainty of the outcome, we have not made any changes to our valuation and maintain our fair value estimate of $20 per share for Walgreens.

The announcement comes as investors lose confidence in Walgreens, which has been hurt by various headwinds, including falling margins in its prescription business, weak retail performance, unhealthy leverage, and store closures. We believe it also didn’t help that the firm’s US healthcare assets (which previous chief executive Rosalind Brewer helped build out through multiple acquisitions worth over $10 billion collectively) have not met our performance expectations. These assets faced cutbacks when Tim Wentworth took the helm. Despite these challenges, we believe an eventual recovery of the business could reignite investor appetite over the long term, and we think Sycamore shares a similar perspective.