Investors are cheering the recent report that suggests Walgreens Boots Alliance Inc (NASDAQ: WBA) is considering selling itself to Sycamore Partners – a private equity firm based out of New York.
But analysts at TD Cowen are not sure about the logic behind such a deal.
The investment firm questioned how a PE company could help Walgreens with its ongoing turnaround plan.
“A private equity firm would need to believe it can turn around the US Retail segment at least in line or better than management’s current plan” – but we are uncertain that Sycamore could do that, it told clients in a note on Wednesday.
Nonetheless, Walgreens stock rallied close to 20% on the news.
Walgreens could separate Alliance Boots UK
Walgreens is already in talks with Sycamore over a potential takeover and could finalise a deal in early 2025, as per people that talked to the Wall Street Journal on condition of anonymity on Tuesday.
The embattled chain of retail pharmacies has been wrestling with store closures and a stock price decline due to fading sales for the longest time.
A potential deal between Walgreens and Sycamore Partners could separate the Alliance Boots UK business that the multinational spent over $15 billion in total to acquire in 2015.
TD analysts dubbed it a “curious choice” in their research note since the Alliance Boots UK business generates solid free cash flow – and a key reason why Walgreens is cutting costs as a part of its broader turnaround plan is to improve its cashflows.
Despite the post-news rally, Walgreens stock is down more than 60% year-to-date on Wednesday.
In September, our market analyst Crispus Nyaga said WBA is oversold and a positive news could send its shares up dramatically.
Sycamore could value Walgreens stock at $12
While TD Cowen isn’t sure about the rationale that motivated Walgreens and Sycamore Partners to engage in discussions, it’s convinced that a buyout, nonetheless, is possible.
In fact, Sycamore could value each share of Walgreens Boots Alliance at $12 if it proceeds with the takeover, the investment firm added in its note.
Despite struggles, Walgreens topped Street estimates for profit and revenue in its latest reported quarter.
That may be part of the reason why TD Cowen continues to rate its stock at “buy”.
Its $14 price target suggests another 38% upside from here.
Walgreens shares pay an exceptional dividend yield of 9.60% as well that makes them all the more exciting to own.
Note that the last time Walgreens Boots Alliance has attempted to go private was before the pandemic in 2019.
At the time, the retail pharmacy chain was worth about $55 billion.
In comparison, its market cap at writing sits at just over $9 billion only.
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