WILL WALGREENS BE ACQUIRED BEFORE THEY GO PRIVATE?

The company recently announced a corporate cost cutting initiative with a goal of $1.8 billion in expense reduction by 2022 -an amount that was increased from an original objective of $1.5 billion.

One portion of it consists of closing about 40% of its in-store clinics as it initiates new strategies to boost profitability. The clinics selected to close are those which are operated by Walgreens. The remaining store-based clinics operated through partnerships with healthcare provider organizations such as hospitals or healthcare systems will remain open.  About 150 clinics are impacted by this and slated to be closed by the end of the year.  Over 200 clinics will continue to run through the existing healthcare provider partnerships.

Opportunities to partner with an industry leader

This announcement triggered hospitals, health systems and other healthcare provider organizations located near the units with clinics designated to be closed to inquire about taking over those operations. TriHealth, a 5-hospital healthcare system in Cincinnati, Ohio has already moved forward for the opportunity to operate 7 of the in-store Walgreens clinics in their area.

Investment required for a Walgreens Boots Alliance private equity deal may involve several players

The estimated $50 billion to $60 billion required to take Walgreens private is quite a large sum. It is likely more than one investment firm would be needed not just for the funding but to share some of the risk involved. Private equity firm KKR already has a stake in the company from past deals with the organization. A key consideration in taking the company private is managing its current debt load which is about $17 billion. Reportedly Walgreens is working with investment banking advisement firm Evercore to assess what is involved to proceed further.

Does the prospect of Walgreens going private trigger someone else to buy them?

Based on its many attributes, Walgreens is an extraordinarily valuable company and potentially a target for another type of ownership change. It generates over $136 billion in annual sales. Conceivably another company could make a run at acquiring Walgreens before they went private. Key considerations for another retailer to buy Walgreens would include the financing of the deal itself, integrating the new organization and assuring profitability while servicing their existing debt and the new debt of the deal --which would have the added burden of Walgreens' existing $17 billion debt load. 

Unique potential that demands a solid suitor

It is very unlikely their largest retail pharmacy rival, CVS, to even consider acquiring them based on antitrust issues and their recent acquisition of insurance company Aetna but there are several other potential buyers to think about.

Despite Walgreens' debt load and the scale of a deal, their consumer retail and pharmacy business savvy plus technology and logistics leadership are undeniably platinum assets not to mention excellent store locations and large share ownership of AmerisourceBergen.

Largest contenders would have to confront enormous operations and financial challenges

On the surface, there are some big retail and online players to consider. Once the fiscal and organizational details are looked at more closely, only a small number of companies are viable contenders:

Amazon is a viable long shot but several factors must be considered. They generate about $233 billion in annual sales. They are not acquisition or risk adverse. Walgreens would give them direct penetration into numerous retail markets and access to millions of everyday consumers and prescription drug customers. Amazon has already stepped out of its online-only business model through its acquisition of Whole Foods in 2017 for $13.4 billion and opening of Amazon Go stores. Walgreens stores gives them a strategic storefront presence without having to commit to larger retail footprints like grocery outlets or mass merchandisers. The Walgreens store concept is based on walk-in consumer convenience as are Amazon Go stores. 

Amazon is seeking to widen its business in healthcare and fortify its PillPack unit. A Walgreens deal would be gargantuan even for them.  It offers incredible opportunities as well as challenges which makes it conceivable for Amazon to at least mildly consider.

Kroger is currently collaborating with Walgreens on a few initiatives. Kroger recently announced it was moving forward with cost cutting initiatives. The combination of Kroger, the nation’s largest grocery chain, and Walgreens would be a formidable tandem. Kroger is the world’s third largest retailer with over $119 billion in yearly sales; they trail only Walmart and Costco Wholesale. Their combination is viable; it would reasonably diversify and complement their existing business models and customer bases.

Netherlands-based Ahold could be another contender based on domestic and global market potential. Ahold operates stores in numerous global markets as well as the United States. Their annual sales are roughly $73 billion. Picking up Walgreens would widen their business model and add revenue streams to their bottom line in the U.S. and Europe but financially it's out of their reach.

Grocery chain Albertsons ( NYSE: ABS ) generates about $60 billion in annual sales. Their acquisition of Walgreens would be a stretch but enable them to broaden their organization beyond the grocery sector and give them exposure into more geographic markets. The financial scale of the deal even without the $17 billion debt load is not something Albertson's can consider in their plans.

Costco ( NASDAQ: COST ) produces over $142 billion in yearly sales could pull it off but may not be the best fit in their business model. Acquiring Walgreens would indeed diversify their business model which could be a primary reason for them not to explore a deal outside of the scope of where they have had such great success. It would indeed provide them opportunity to augment their overall presence in consumer health and pharmacy sectors. Such an extreme departure from their winning commercial formula has its pros and cons. Financially Costco could have the fiscal horsepower to undertake such a deal but likely not consider the rewards to be worth the risks. 

Target Corporation ( NYSE: TGT ) generates about $75 billion in annual sales --its relationship with CVS a major hurdle to overcome. Buying Walgreens would be a significant hurdle for them financially and involve another sticking point. Target’s pharmacy units within their stores are owned / operated by CVS. If Target were to acquire Walgreens, the CVS pharmacy ownership arrangement would someway have to be undone. Target Corporation is not going to entertain an acquisition of Walgreens.

Walmart ( NYSE: WMT ) is an interesting and qualified prospect for numerous reasons. A number of former Walgreens pharmacy executive leaders are presently working at  Walmart headquarters within the U.S. pharmacy business unit. Walmart generates over $514 billion in annual sales. Walmart and Walgreens have been dueling over consumer and pharmacy sales for years despite their differing big box versus chain drugstore business models. Walmart has experimented with smaller footprint stores to efficiently and profitably gain access to more retail customers. Buying Walgreens would give them that access plus bolster their consumer health and pharmacy business.

Undoubtedly antitrust concerns would come into play but there may be enough differentiation based on the pairs' big store / mass merchandiser and convenience retail / pharmacy organizations that regulators would approve the combination.

Moving forward

There is a lot for Walgreens, its competitors, investors and potential suitors to consider. Based on this lineup, Amazon Kroger and Walmart are potential suitors; Costco a runner up based on a presumed reluctance to tamper with its unique and successful business model. The attractiveness of a present-day opportunity to acquire Walgreens is great, the long-term commitments and challenges still have to be considered. A takeover by public or private entities requires the new ownership to undertake swift, strategic action to boost Walgreens profitability without disrupting day-to-day operations and whittle down its $17 billion debt load; a tough prescription to fill.

LinkedIn: John G. Baresky

Twitter: Healthcare Marketing Guy