Shares of Walgreens Boots Alliance (NASDAQ: WBA) rose 20% as of 2:35 PM ET on Tuesday.
The bankrupt pharmacy benefited from rumors that the company could be bought by a private equity firm. Normally buyouts occur at a premium to the market share price, and with shares down 63% on the year and 90% from their highs, there was plenty of room for a premium to of yesterday’s closing price.
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Today, The Wall Street Journal reported that private equity firm Sycamore Partners is in discussions with Walgreens about a possible acquisition. The WJ reported that according to “people familiar with the matter”, talks could conclude early next year.
Walgreens is much smaller than the $100 billion market cap it reached in 2015. The value fell to just $7.4 billion yesterday, but rose to over $9 billion at the time of writing. That would make it a big deal for Sycamore, but also feasible as private equity has attracted more investor money in recent years. That said, Walgreens is also weighed down by about $8 billion in net debt, not including operating leases.
Walgreens has attempted a turnaround under CEO Tim Wentworth, a native of the pharmacy benefits manager (PBM) industry whose tough drug reimbursement negotiations have been a source of Walgreens’ depleted margins.
While Wentworth recently said negotiations with PBMs to get better reimbursement rates are going well, other tech-savvy retailers and e-commerce players are also moving quickly to offer same-day pharmacy delivery services. This additional threat may require more investment from Walgreens to compete, and low-revenue spending could deter public market investors. Apparently, Sycamore thinks it can help Walgreens turn away from the prying eyes of the marketplace.
Today’s bounce indicates that investors think a deal is likely, but further gains from here could be difficult. Walgreens is down a lot from its highs, but also has major challenges that will likely limit the amount Sycamore is willing to pay. In the meantime, if a deal doesn’t materialize, expect shares to return to their recent lows.
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