Walgreens Boots Alliance (WBA) executive chairman Stefano Pessina is understood to be making an audacious play to take the health and wellness group private. Could he, and should he, pull it off?
If Pessina is successful, it would be the largest leveraged buyout in corporate history, valued at $70bn.
It’s a jaw-dropping move, but one that is not out of character for the 78-year-old billionaire, who has built his career on dramatic deals.
Pessina first arrived on the UK retail scene in 2006, when he orchestrated the merger of Boots and wholesale pharmaceutical giant Alliance – having previously merged Alliance with pharmacy distributor Unichem in 1997 – which was listed on the London Stock Exchange.
Unhappy with how the health and wellness group was valued by the City, he went on to lead a leveraged buyout of Alliance Boots in 2007, with an £11bn deal facilitated by private equity firm KKR, taking it private.
But Pessina wasn’t finished there. He went on to sell Alliance Boots to American pharmacy retail titan Walgreens for $23bn in 2012, and the WBA empire, of which Pessina is the largest shareholder with a 16% stake, was born.
It was this final piece of groundbreaking financial engineering that led to Pessina being awarded Retail Week’s Leader of the Year award in 2013. At that time, the Italian born entrepreneur was to the point about his career to date: “I seize opportunities when they are there.”
So, is taking WBA private Pessina’s next great opportunity – or is it a move too ambitious for even Pessina to pull off?
Going cheap?
WBA is understood to have held informal talks with private equity firms including former ally KKR to explore appetite for the take-private deal. As one investment banker said, the amount of “negative sentiment” around retail has driven down the share prices for a lot of businesses in the sector.
“Even if you are a category killer and a standout performer, your valuation can be dragged down by sector sentiment, which makes for an ideal time to buy back shares at an absolute bargain,” the banker says.
WBA could not be described as a standout performer of late. In its full-year results last month, operating income declined 20.5% as it ramped up its cost-cutting drive to make $1.8bn of savings rather than the previously mooted $1.5bn.
Boots’ poor performance was the primary factor in the group’s international operating income slumping 78.7%.
This volatile trading is reflected in its share price, down around 22% year on year, with both the retail and pharmacy divisions of the business under pressure.
The same investment banker noted that although there’s “a lot of private equity liquidity” in the market at the moment due to low deal volumes, the scale of this deal means that only a small number of private equity firms could feasibly be involved. KKR is, of course, one of these.
There may be the potential to nab a bargain as some of WBA’s shareholder may be persuaded to sell cheaply to free up cash, however, one private equity source says there is limited appetite to invest in consumer businesses right now. “It would be a very bold move to pull it off,” he says.
Weak investor appetite
Walgreens and Boots are both mature businesses, without fast-growth potential, and a lack of owned property means there’s not a clear opportunity to benefit from divesting assets. This will quash investor interest to buy WBA.
Meanwhile, Pessina is not a young man and with no obvious successor for his empire, pulling off a deal of this scale could easily tip from ambitious to foolhardy.
More immediately, the level of investment needed to get Boots and Walgreens’ store estates firing on all cylinders is significant.
Over 90% of the UK population live within ten minutes of a Boots branch, and although the business’ shiny new Covent Garden flagship is a statement of intent, it is the tip of the iceberg in terms of the level of work needed to get its UK store estate fighting fit.
Perhaps Pessina believes the business is undervalued and knows he has form in engineering financial arrangements that could, in the long term, take the shackles off the business.
In the meantime, there are two retailers that have been underinvested in that are being hammered by online and offline competitors ranging from Amazon to grocers to new brands like Glossier and Kylie Cosmetics. Perhaps the wiser move would be to forget about the financial engineering and focus on making the business more relevant in this rapidly changing market.
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