Many Problems & Caveats Face Any Would-Be Acquirer of Walgreens, Even Warren Buffett
It’s one thing to think that there is a value investor’s dream awaiting in the shares of Walgreens Boots Alliance Inc. (NASDAQ: WBA). It’s another thing to really consider that a member of the Dow Jones industrial average, the newest component among the 30 members that is, would actually fit within a “go-private” news story. And it’s a far greater commitment to believe that private equity or Berkshire Hathaway Inc. (NYSE: BRK-A
For starters, Walgreens has been battered ahead of this latest headline noise. It is a dirt-cheap value stock too. On top of a 3.3% dividend yield that is over one point higher than the 30-year Treasury “long bond,” Walgreens is only valued at about 10 times current and earnings per share. That’s crazy cheap, after looking at a Refinitiv consensus earnings forecast that showed the S&P 500’s forward fourth-quarter P/E ratio (Q4/2019 thru Q3/2020) is up at 17.7. It’s also crazy to think that the rumor mill might be so hard at work on the same week that the Dow and S&P 500 hit all-time highs again.
A headline report from Reuters suggested that Walgreens was exploring a deal to go private, and it even noted that Evercore was tasked with exploring whether a deal is even possible and that any deal is far from certain. As far as the source, it’s the “according to people familiar with the matter.”
An amended 13D filing with the Securities and Exchange Commission showed that a group called Alliance Santé Participations now owns 144,788,821 shares of Walgreens. That is a 16.2% stake owned by the so-called ASP investment group based in Luxembourg. A slew of insiders also have acquired shares or been given grants of restricted stock units.
Late in the day, a Barron’s report from Andrew Bary suggested that Warren Buffett should be the one who acquires Walgreens. While Buffett has openly said he would love to commit a big chunk of Berkshire Hathaway’s $128-and-growing billion cash arsenal for one of his “whale of a deal” transactions, he also has said that the cost of paying to have outright ownership of large corporations in the current investor climate has been incredibly high.
While the “cheap” factor is there for a value investor, Buffett could not expect to get an at-the-money purchase price. Many shareholders would shoot the deal down if there was not a substantial premium because any shareholder who purchased shares from 2014 through early 2018 would be losing their shirts in a cash buyout. Buffett could always choose to participate in a huge stake in a potential transaction, but that has turned out quite badly in the debacle of his Kraft-Heinz Co. (NASDAQ: KHC) stake in his deal with 3G.
It would be easy to say that Walgreens, even at a premium, would be accretive to earnings. One problem here is that there is no real growth, and who would want to guess what will happen to profits if a Medicare-for-all plan meets continued lower drug price targets from both sides of the political aisles in Washington, D.C. And what about Buffett’s involvement in running a targeted health care cost reduction plan with Amazon and JPMorgan that is targeting a non-profit motivation? That might bring serious partner objections on any whale of a deal here, and that partnership called the effort at the time as targeting health care in a way that would be “free from profit-making incentives and constraints.”