Boots exit may smooth way for Walgreens buyout - Reuters

Pedestrians walk past a Boots branch in Leicester, central England June 9, 2008. Britain's biggest pharmacy chain, Alliance Boots, posted a 20 percent rise in annual profit in its first year as a private company and said it was confident about its prospects despite a downturn in consumer spending. Photograph taken on June 9, 2008.

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NEW YORK, Dec 6 (Reuters Breakingviews) - Stefano Pessina, the executive chairman of Walgreens Boots Alliance (WBA.O) and inveterate dealmaker, might have another one up his sleeve, or possibly two. The $40 billion transatlantic drugstore operator is mulling selling its UK chain Boots, according to Sky News. With private equity snatching up British assets, it’s a good time to sell. And if Pessina is still considering a buyout of his own, a leaner Walgreens would be an easier target.

A sale of Boots would be an abrupt exit for Walgreens, but still probably makes sense. The U.S. group firm paid around $22 billion for the group from Pessina and KKR (KKR.N) in 2012 and 2014, who had taken it private back in 2007. Since then Boots has struggled, thanks to online competition. But store closures and more investment mean revenue is now rising. And private equity groups are hungry for UK retail assets, with Clayton Dubilier & Rice recently paying $10 billion read more for grocer WM Morrison. A sale on the same 9 times EBITDA multiple would value Boots at $8 billion or so, according to Cowen estimates. Walgreens already sold most of its European drug distribution business for $6.5 billion earlier this year.

Chief Executive Roz Brewer has better uses for that cash. Her focus is on the United States and beefing up stateside stores to fend off the online threat. In October, she agreed to invest $5.2 billion in VillageMD, which is opening hundreds of clinics at Walgreens outlets. The pandemic, which has boosted revenue as people rushed to their local stores for over 40 million vaccinations, has shown the model can work.

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A sale might also smooth the way for another Pessina blockbuster deal. Private equity groups sniffed around Walgreens in 2019, but never bit, likely due to the mammoth $20 billion of so equity they would need to stump up to make a deal work. But a leaner, smaller company might make a buyout more palatable. Walgreens stock has lost about 40% of its value over the past five years, and is now valued at 9 times estimated EBITDA over the next 12 months, a discount of around 15% versus peers, according to Refinitiv figures. That might even tempt Pessina, who owns a 17% stake in the group, to try his luck again.

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CONTEXT NEWS

- Walgreens Boots Alliance is considering selling Boots, its UK health and beauty retailer, according to Sky News. The drugstore chain has hired Goldman Sachs to advise it on its options, which could also include a listing, Sky News reported.

- In January, WBA agreed to sell the majority of its European drug distribution business for approximately $6.5 billion. In October, WBA said it would invest $5.2 billion in VillageMD, increasing its stake in the care provider to 63% from 30%. VillageMD is opening doctors offices attached to Walgreens drugstores and said it aimed to have 600 primary clinics open by 2025.

- Walgreens first acquired a stake in Boots in 2012, from KKR, eventually taking full control in 2014.

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Editing by Neil Unmack and Sharon Lam

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.

Sign up for a free trial of our full service at https://www.breakingviews.com/trial and follow us on Twitter @Breakingviews and at www.breakingviews.com. All opinions expressed are those of the authors.

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