Is the Allegation Suggesting Walgreens Boots Alliance Shares Are Worth Purchasing?
Due to a massive decrease in its share value by over 80% within the past three years, investors are actively seeking significant changes in the operational strategy of Walgreens Boots Alliance (WBA 3.37%). If current chatter is to be believed, these changes could materialize imminently, impacting every shareholder.
Yet, is this enough to consider purchasing the stock? Let's delve deeper and examine the underlying factors.
Reasons the potential transformation could be beneficial
Before addressing the buzzing rumor, let's review the current state of Walgreens.
Its 12-month normalized diluted earnings per share (EPS) has declined by almost 1% over the past five years, reaching $3.77. In its most recent quarter, the fiscal fourth quarter, their management attributed the plummeting earnings to various factors such as demanding reimbursements from health insurers and a deteriorating retail environment in the U.S. This is likely to concern investors, as these issues were not prevalent between late 2022 and mid-2023, a period during which Walgreens reported losses.
To counter the eroding profits in its pharmacy business, the company managed to save more than $1 billion in costs during fiscal 2024 and also reduced capital expenditures by $600 million. It plans to close around 1,200 of its pharmacies over the next three years, approximately 500 in 2025 alone. While these initiatives might bolster profits, the positive impact will not be instant and will result in lost revenue. Hence, the company is expected to be leaner and more resilient, albeit smaller, in the near future.
Lastly, it boasts an impressive long-term debt and capital lease obligations of $28.9 billion. Despite repaying $30.4 billion in long-term debt in the 12-month period, it acquired another $31.3 billion, resulting in a net increase in debt. This raises its total debt-to-equity ratio to an alarming 277.9%, signaling potential difficulties in meeting its financial obligations.
When publicly traded companies face crippling debt levels despite possessing valuable real assets, private equity (PE) firms sometimes intervene, offering sufficient funds to buyout the company, resulting in either restructuring or optimization. On December 11, The Wall Street Journal reported that Sycamore Partners, a PE firm, was holding discussions with Walgreens regarding a potential acquisition. This news propelled the stock price by about 20%.
However, would such an acquisition make the stock a worthwhile investment?
There isn't a persuasive investment case presented here
Should Sycamore agree to acquire Walgreens with the intention of taking it private, shareholders would likely be required to endorse the deal.
Assuming they vote in favor, shareholders will likely be compensated for their shares upon the transaction's completion. Although it's plausible that the compensation will come at a premium compared to Walgreens' share price at the deal's closing, the premium might not be substantial enough to warrant buying the stock ahead of time, especially if the negotiation process extends over a couple of quarters, causing the share price to decrease further.
Thus, we lack a robust investment case to purchase the stock based on this rumor. Keep in mind, satisfied execution of the transaction is essential for the PE firm to enhance efficiency, but there's no imminent revenue or profit driver that would boost earnings, aside from any plans by the current management.
Nonetheless, shareholders currently facing losses should feel buoyed by the prospect of a share price surge on the announcement of a deal, even before obtaining official approval. In the absence of a prolonged recovery, this could represent the best chance for an exit.
In light of the potential acquisition by Sycamore Partners, some investors might consider investing in Walgreens Boots Alliance, hoping for a share price surge. However, without a substantial premium or a clear revenue or profit driver, an investment case remains elusive. Additionally, continuing financial challenges necessitate prudent consideration, especially when it comes to Walgreens' high debt-to-equity ratio and looming financial obligations in finance.
