Retail’s last barbarian takes on Walgreens Boots
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It's a Thursday afternoon, and I'm standing outside on a street corner with my colleague Amelia Pollard. We're in Manhattan. It's late March and super misty outside and pretty gross, honestly. I'm with Amelia as she's about to run a quick errand inside of a Duane Reade shop. Duane Reade is a part of the massive Walgreens Boots pharmacy chain.

And we wanted to be on the ground here and see what it's like inside and how the pharmacy business is faring in Manhattan, at least. We can't speak for the rest of the country, but we'll get a sense of what it's like inside here. And I'm going to buy some conditioner. Yeah, so going inside. Okay, let's see where we should go. It's pretty empty. It's just before rush hour. Do you see where the conditioner is? I do not. There's... I'm looking at...

A poppy seltzer and monster energy drinks and Gatorades and Starbucks Frappuccinos in bottles and Q-tips, Evian water bottles, all the above. We're still looking for a conditioner. What you're hearing is a situation that might sound familiar to you.

Stopping in a pharmacy to pick up a quick item, and maybe it's nowhere to be found. Or maybe it's locked up behind a plexiglass case. Is this it? No, I think this is face wash. Okay. Do they have conditioner? We never did find that conditioner. And it's these kinds of inconveniences that underscore the idea that e-commerce retailers like Amazon are eating the lunch of brick-and-mortar pharmacies.

And hearing all that, it's probably not that surprising to learn that the share price of Walgreens Boots Alliance has been absolutely decimated over the last decade. Walgreens Boots is an international global brand. So they run thousands of pharmacies across the world and they have a huge U.S. business, Walgreens. They run a huge U.K. operation, Boots, and they're massive.

All the businesses combined today are one of the biggest pharmacy chains in the world. They are a publicly traded company and as

As recently as 2015, the market capitalization was around $100 billion. So it was just massive and super lucrative. But in the last 10 years, the stock has just slid so much. It's now worth just around $9 billion. Some $90 billion worth of value gone. Typically, when a public company is faring that poorly on the stock market, investors just...

are not pleased with management's execution and the way they're running the business, it's a good time to basically bring it behind closed doors and take it private. But more recently, private equity firms have largely steered clear of Main Street acquisitions like Walgreens Boots.

Everyone that is, except for one firm called Sycamore Partners. Earlier this month, Sycamore announced that they'd be taking Walgreens Boots private in a nearly $24 billion leveraged buyout, or debt and equity deal.

It's not only the biggest deal they've ever done, but it's one of their biggest deals in a long time. And on top of that, it's their first foray into the health care sector or the pharmacy business, which comes with its own set of challenges. And so this is a real test, especially to their investors, of whether they can take on a company of this scale and really make money. I'm Michaela Tendera from the Financial Times. Today on Behind the Money...

Why Sycamore Partners is pushing into retail leveraged buyouts. And can they succeed in what could be their toughest one yet? As you heard, a lot of the major private equity firms have been taking a big step back when it comes to leveraged buyouts of retail companies. One thing is that Blackstone, KKR, and Apollo just talk about the big three, so to speak.

are today huge, sophisticated financial institutions. Just for context, all three of these firms oversee more than $500 billion in assets. So they've really evolved beyond just private equity or leveraged buyouts. They have huge credit businesses. Blackstone's really well known for its real estate investments. So doing retail buyouts just isn't their priority anymore.

Plus, there's another concern that's keeping them away, the potential for bad publicity. The worst case scenario for any private equity firm that's bought a company is if the company winds up filing for bankruptcy. When a company files for bankruptcy, as we saw very famously with stores like Sears and Toys R Us, it can lead to massive layoffs and store closures.

Oftentimes, these are household name brands. And so consumers freak out, shoppers freak out, and the press cover it like crazy. Requiem for a retail heavyweight. More than 125 years since it was founded, Sears files for bankruptcy today. Crippling $5 billion debt. Toys R Us is filing for bankruptcy protection. This is...

And so the calculation also for these private equity firms is just maybe it's not worth it. And there are so many other investments they can make at this point just because of their sheer size and the way the business has changed. As private equities' biggest players have left retail behind, they needed an opening for other firms to step into. But so far, one guy really seems to be taking the bait.

His name is Stefan Kaluzny, and he is known as really the go-to guy for kind of thornier retail buyouts. Now, Stefan Kaluzny founded Sycamore Partners in 2011, but he'd been working on retail acquisitions for years before that. Kaluzny really honed his craft of big retail buyouts at Golden Gate Capital, which is another private equity firm based in San Francisco.

So these big retail buyouts, like the kind that Kaluzny worked on, tend to go something like this. Private equity firms' main goal essentially is to improve margins and improve profits. So you want to cut costs quickly. That's the fastest way to ensure that you're making more money. And that can be done by closing down underperforming stores, potentially laying off employees, and just generally changing the business's strategy.

PE firms tend to operate on a five- to seven-year horizon. That means that after that amount of time, these firms want to make an exit and return money to their investors. That tends to happen by either selling the business or taking it public. The big crowning moment for Klusny was the acquisition of Express, the retailer, in 2007. Express is one of those early 2000s shopping mall staples for young women.

The sort of place where you could buy slacks for work or a pleather skirt for a night out. Klusny was able to take the company public. And that's basically the best possible exit for a private equity firm. What you're hearing right now is footage from that day when Express went public on the New York Stock Exchange in May 2010.

Amelia, where's Kaluzny in this video? Do you see him? Yeah, I see Stefan Kaluzny standing right up front. And he is standing next to Michael Weiss. And he had been a longtime Express CEO for many years. They're on the New York Stock Exchange floor. There's a gaggle of what looks like executives. And they're elated. I mean, they're all beaming. I mean, they just all made a ton of money, obviously. So they're psyched. And the vibes are great.

Shortly after the Express IPO, Klusny starts his own PE firm, Sycamore Partners. He had really cut his teeth doing exactly this at Golden Gate, and he was ready to strike out on his own. And so over the years, they've acquired some really household name brands, at least in the U.S., like Talbots and Ann Taylor, you know, both women's retailers. And in 2017, they struck a huge deal for Staples, which is the office supplies retailer.

Now for Sycamore and Stefan Kaluzny, going after these kinds of deals and having success with them means following a specific playbook. Number one.

Sycamore is constantly surveilling the landscape of what might be up for sale next. And so one veteran Wall Street banker told us that Sycamore keeps dossiers on hundreds of brands. And so they really know the landscape inside out. And when a share price drops below a certain threshold, that can make a great acquisition. When an acquisition comes into focus, that's when number two happens.

The next step is Sycamore and Klusny especially make sure that he never overpays for a company. And something I was able to figure out is that he's not afraid to at the 11th hour try to get a better deal. Klusny will often, once a deal has been agreed, kind of on handshake terms for, let's say, $11 a share, he'll call the chair or the CEO and say, whoops, I can only actually do this for $10.50 a share at this point. And

And that's risky because the company can just walk away. But especially in the last few years, there are not that many other buyers out there. And so he knows that he has the upper hand and he's very good at getting the best price. So step one, find the best target. Step two, snag the lowest price. And then step three, once the deal's closed...

They make aggressive, quick plans to get their equity investment back. And they do that in a few ways. So sometimes they'll break up the company or sell off some real estate or they pull off some financial engineering. That would be something like dividend recapitalizations. That's where they extract cash out of the business to pay back themselves and their investors. So Sycamore has a big appetite for private equity hardball. So private equity generally has a reputation for being aggressive.

These firms need to make money for their investors, and that's their bottom line. But what some of the bankers and lawyers who I talked to said is that what sets Sycamore apart is they're hyper-aggressive and also don't care that that's their reputation. And the firm, you know, goes after these retail deals that other people, as one banker described to me, wouldn't touch with like a 10-foot pole. They're just not afraid to bid on maybe Messier or kind of struggling retail brands. So now the question is...

Can this playbook that Kaluzny's developed on a lot of clothing retailers work for a really different kind of business? Work management platforms. Ugh. Endless onboarding. IT bottlenecks. Admin requests. But what if things were different? We found love.

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So, as we said, earlier this month, Sycamore Partners announced their plans to acquire Walgreens Boots in a nearly $24 billion debt and equity deal. Obviously, with any leveraged buyout, including this one, it's going to be a high wire act. There's billions of dollars of debt involved with this deal. And with interest rates still high, it could be expensive to pay it off. Now, not only is this Sycamore's biggest deal yet, it's also their most unique.

And it raises some important questions about whether their tried and true playbook will work on a company that has the kinds of issues that Walgreens Boots has. I asked Amelia about how big of a deal this is for Sycamore to be taking on a pharmacy business like this.

This will be a huge test for Sycamore because they have not ventured into health care before. And this has its own health care businesses and pharmacies in particular have their own whole host of problems. Let's just look at Walgreens, for instance, the U.S. pharmacy business. So one huge problem for Walgreens has been drug reimbursements.

So how much pharmacies get from insurers or government programs for the medicines they're selling. Yeah, exactly. And basically other big competitors like CVS have struck deals with insurers to try to help bring down their drug reimbursement costs.

But Walgreens has kind of missed the boat on that. And so as a result, they've been squeezed by drug costs in recent years. And that's been a huge hurdle for them. Another problem is that they are facing opioid liabilities. So a lot of pharmacy chains in the U.S. have stared down huge lawsuits and litigation and ultimately liabilities for the opioid crisis because of how they handled it.

opioid prescriptions. So just those two veins alone will be huge hurdles and issues they'll have to tackle head on. Right. Those are significant issues. And of course, as we saw when we went to the Duane Reade in Manhattan, there's also the more general problems the chain's facing, where it can just be kind of difficult to shop in store and more consumers are choosing to shop online. Right.

So, Amelia, what do you know about Kaluzny's plan to turn Walgreens Boots around? Is it using just the same playbook that they've had? Yeah, so they'll be using a similar playbook from what we can tell. It seems like the plan is to split Walgreens Boots into a few different businesses.

So the Walgreens U.S. pharmacy business will be its own entity, presumably. And then Boots in the U.K. will also be its own business. And that's kind of this vein that has been a trend recently in dealmaking of breaking down conglomerates into smaller kind of bite-sized chunks. And that will make it so that Sycamore in a more targeted way can address cost concerns or in the U.S., for instance, you know, presumably they'll be shutting down some stores, especially ones that have not been performing as well. Yeah.

So that raises something else. We haven't actually talked much about the boots side of all this.

How is the U.K. business doing, and are there any big concerns there? So the Boots business hasn't struggled in the same way, but they have had some of their own problems. Even still, though, their problems have been less bad and less entrenched than in the U.S., and that's also part of the thinking behind splitting them up. They have two different sets of issues or problems, and so they should be run separately.

And it's not yet exactly clear how or what the timing will be for splitting up the company. But if you look at past examples like Staples, there will probably be some kind of financial maneuvers or engineering just to get cash out quickly. Yeah. So the idea of getting cash out quickly, how much success has Sycamore had of doing that while, you know, also keeping the businesses they've bought afloat?

Sycamore has had some successes and failures. So Staples is one good example of what's so far been a success. They bought the company in 2017 and were quickly able to split it into three units. And today it still runs lots of locations across the U.S.,

But on the other side, we have seen some corporate failures. A couple of investments have landed in bankruptcy over the years. So Nine West, the shoemaker, filed for bankruptcy in 2018, and that led to a really messy legal fight with some of its creditors. And then Belk, another retailer, filed for bankruptcy during the pandemic. So both of those are essentially signs that this is a really precarious and maybe even delicate act.

If there are missteps, this can end in litigation and get messy very quickly. So how different would it be if Walgreens were to go bankrupt compared to, say, a Nine West? You know, how influential or impactful might that be? Yeah. So with a pharmacy business like this, the stakes are way higher. So they're not selling club leather miniskirts like they were with Express. They're selling prescriptions and providing vaccines and medications.

Maybe I'll just speak to Walgreens in the U.S. because there's already been a decline of pharmacy chains. And so they'll inevitably have to shut down some of these locations in the U.S. And that could lead to pharmacy deserts, which is this phenomenon that's really gripped the country recently where

especially rural locations. I've had so many pharmacies closed down that there are huge areas that do not have access to pharmacies. And that means that residents don't have access to things like vaccines or regular prescriptions. And these are also areas that cannot as easily rely on pharmacy deliveries from the likes of Amazon or other big retailers.

And if things go badly with a massive pharmacy chain and especially, you know, one of the biggest in the U.S., but a global brand like this, the risk of political backlash and consumer backlash is huge. Yeah. Do you think that Kaluzny and Sycamore have the chops to turn around Walgreens boots then?

I think it's a good thing that Walgreens Boots will no longer be a public company because that clearly hasn't worked for them in recent years. And especially speaking to the U.S. business, since I'm familiar as a consumer myself, they need a real business overall on strategy. So something had to change. And I'm unsure whether Sycamore...

is better equipped than anyone else to really turn the business around. A lot of retail analysts I spoke to were skeptical that they were up to the challenge of just how many problems pharmacy businesses in the U.S. face, especially. And one other thing that's important here is that the motives and goals of a private equity firm don't always align with customers or employees or other stakeholders' goals for a company.

The metric of success for Sycamore is obviously different than what you or my metric of success might be for a pharmacy chain. So our idea, or at least my idea of quote unquote success, might be whether Walgreens is a pleasant place to shop, whether it's convenient and has my favorite products or medications that I need. I don't own the company. You know, we don't own the company, so we don't care about profits. But Sycamore's metric is making money. They're a private equity firm and that's their M.O.

Thanks for listening.

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