Walgreens Boots Alliance has announced a significant shift in its business strategy by agreeing to be acquired by private equity firm Sycamore Partners, potentially ending its century-long status as a publicly traded company. This decision comes after years of struggling to improve its financial standing. Despite the optimistic outlook, historical precedents suggest that such acquisitions often lead to further decline rather than long-term success.
Once a dominant force in the U.S. pharmacy sector, Walgreens (WBA, Financial) has seen its stock plummet by 83% over the past decade, with a 71% drop in the last four years alone. The anticipated acquisition has temporarily buoyed its stock, which rose over 7% recently. Both Walgreens and Sycamore Partners claim the acquisition will accelerate the company's ongoing transformation.
However, the retail sector is littered with examples of former giants that failed after private equity takeovers, such as Toys R Us and RadioShack. Even survivors like Aeropostale only managed to continue after bankruptcy proceedings. While some private equity-owned retailers, like Staples under Sycamore Partners, have thrived, skepticism remains about whether this model can work for Walgreens.
Private equity often involves saddling companies with debt to generate returns, which can lead to store closures and layoffs. Walgreens has already closed numerous locations, with plans to shutter 1,200 more. The company has also lost its position as the largest U.S. pharmacy chain to CVS Health (CVS) and faces increasing competition from Amazon's online pharmacy, as well as retail giants like Walmart and Target.
Industry experts express doubts about the potential for recovery under private ownership. The fundamental challenges facing Walgreens, including competition and declining reimbursement rates for prescription drugs, are unlikely to be resolved by the acquisition. The transaction may benefit Sycamore Partners financially, but it remains uncertain if it will lead to a sustainable turnaround for Walgreens.
