Shares of Walgreens Boots Alliance (NASDAQ:) Inc. experienced a significant drop of over 6% as analysts expressed skepticism regarding the likelihood of a successful acquisition by Sycamore Partners. This decline comes after the company’s stock had previously surged by up to 28% on Tuesday amid reports of ongoing discussions about a potential sale to the private equity firm.
Analysts from Leerink, maintaining a market perform rating, highlighted the complexity of the situation. Michael Cherny from Leerink pointed out the numerous factors at play, particularly concerning free cash flow generation, which complicates any straightforward answers to questions about the potential acquisition. He suggested that the deal might involve asset divestitures or attempts at real estate monetization, although he noted that the latter could be challenging due to Walgreens’ past sale-leaseback transactions.
Morgan Stanley (NYSE:), with an underweight rating on the stock, also weighed in on the matter. Analyst Erin Wright acknowledged the context of a potential sale amidst a challenging pharmacy environment but questioned the feasibility of a buyout. She cited Walgreens’ considerable debt and limited cash flow as obstacles to identifying a clear path to value creation through such a transaction.
Raymond (NS:) James, also assigning a market perform rating, expressed surprise at the sale talks, given Walgreens’ financial outlook. The firm’s analyst pointed out the difficulties in financing a deal due to Walgreens’ declining earnings and cash flow prospects, coupled with approximately $15 billion in liabilities, including net debt and opioid-related liabilities, other costs related to store closures, and a substantial working capital deficit. The analyst estimated that, based on the current share price, the market is implying a roughly 13 times proforma EBITDA multiple for Walgreens’ U.S. Retail Pharmacy business, which is generous even when factoring in valuations for the International segment and Shields.
TD Cowen, which has a buy rating on Walgreens, offered a slightly more optimistic view. Analyst Charles Rhyee mentioned the possibility of a takeover but noted the lack of clarity on what a private equity firm could do to expedite the company’s turnaround. Rhyee’s sum-of-the-parts and leveraged buyout analysis suggests that a private equity firm would need to have confidence in its ability to improve the U.S. Retail segment’s performance to match or exceed management’s current plans.
Investors and market watchers continue to monitor the situation as it unfolds, with a focus on the potential impact of any acquisition on Walgreens’ future operations and financial health.
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