Walgreens hopped on a private equity rescue ship called Sycamore Partners earlier this year, which closed a $10 billion deal in late August.
While some say that selling to private equity is necessary as retail health care faces numerous headwinds, at least one industry follower is concerned about Walgreens’ future. Private equity firms usually exit the firm five to seven years after purchase.
“Healthcare is a long-term industry. It's about long-term health. It's about maintaining a decades of health. The business model of private equity is essentially short-term. They want to get a company, make money from it, to go bankrupt or sell it to a private equity chief of a private enterprise in other private equity firms, whether it's bankrupt or exiting a company in any way, whether it's bankrupt or sell it to another private equity firm,” tracks private equity movement.
Under Sycamore, Walgreens will be divided into five independent companies: Walgreens (pharmacy), Boots Group (health and beauty retail business), Shields Health Solutions (professional pharmacy solutions), Carecentrix (home health) and Villagemd (primary care).
Sycamore Partners and Walgreens declined to comment.
What might happen
There are several reasons why Parr was involved with Sycamore Partners about the sale.
One of them is funding over 70% of the deals through debt, he said, meaning Sycamore “doesn't have too many skins in the game.”
“Now you've covered a lot of financial problems with Walgreens … Now you're adding more responsibility to companies that Off-Road Moore is in trouble. That can really cause a lot of financial problems for Walgreens,” Parr said.
He added that many communities rely on Walgreens as their sole pharmacy, so any financial challenges at Walgreens will directly impact consumers.
The deal’s debt financing and Walgreens’ disturbing financial problems aren’t the only reasons to focus on Parr.
Sycamore Partners and Mike Motz replaced Walgreens CEO Tim Wentworth, formerly CEO of another Sycamore Company Office Staples.
“Under the CEO’s watch, Staples closed a third of the stores,” he said. “This cuts down thousands of jobs. We need to be cautious if Sycamore applies the same script to Walgreens, if the CEO from Staples applies the same script to Walgreens, then we will have… Thousands of stores closed, thousands of layoffs, thousands of layoffs, and already working to get the Pharmacy Desert in the community that’s working to get the Medication Medication Medication.”
Sycamore Partners also oversees a number of other high-profile bankruptcies, including Belk, Nine West and Aeropostale.
As for splitting Walgreens into five separate companies, Parr speculates that Sycamore is trying to determine which company is the most profitable, which could lead to retail store closures This is a lower margin business and the layoffs in the business are not as good as those in other businesses.
Not everyone has a negative view of trading
For Michael Greeley, co-founder and general partner of Flare Capital Partners, breaking down the company is the right move. Retailers have been struggling with healthcare lately, and Walgreens’ retail business is degrading high-performance assets such as Shields and Carecentrix.
“I think it’s a great move to classify these different assets,” he said.
Another healthcare expert agreed, noting that Walgreens has not successfully integrated all assets into a seamless experience for consumers. This may be why Wuwutong removed it.
“Ultimately, these five businesses have different margin profiles, cost structures and opportunities for success: The company has never been able to leverage the mutual value between each business. By contrast, CVS does, in fact [this] By acquiring Caremark, reducing its drug costs, the merger with Aetna created a closed cycle in customer acquisition and negotiation.
That said, there is no doubt that the deal will result in store closures, which will have a significant impact on underserved communities.
“They will close stores that have no profit or no potential to generate free cash flow. The worry is whether they start closing stores in the market that creates medical deserts?” Greeley said.
It is also worth noting that most of Sycamore's experience is in retail, not healthcare.
“It’s not just a typical retail acquisition, it’s what Sycamore is used to,” Parr said. “It’s a bigger behemoth for them, and smoke-free retail companies already have a background of bankruptcy. So if the same trajectory happens to Walgreens, it’s going to be more destructive than the nine western bankruptcies.”
Image source: Joe Raedle, Getty Images
