Health and Healthcare

Many Problems & Caveats Face Any Would-Be Acquirer of Walgreens, Even Warren Buffett

Jon C. Ogg

Published: November 5, 2019 5:12 pm

Last Updated: January 30, 2020 1:33 pm

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) would actually get a stamp of approval of Warren Buffett to buy out the company. That said, anything seems possible in this crazy world that has become the financial markets.

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.”

Another issue to consider is that any “go-private” deal implies that a merger is effectively a removal of the company from the capital markets. After a 2.6% gain to $61.21 a share on Tuesday, Walgreens has a $52 billion market cap. The company also carries in excess of $17.6 billion in long-term or non-current liabilities, about $11.1 billion of which is direct long-term debt issuance.

A buyer like Buffett might not care what Wall Street Analysts have as a valuation in most investments, but making a deal of this size would be another issue. Refinitiv has seen its consensus analyst target price go down to $56.85 as its shares have slid lower in 2018 until its recent recovery from $50 to back above $60.

One issue that may mask the situation is that Walgreens is buying back stock. While revenues are expected to post between 2% and 3% growth in 2019 and 2020, what would the situation look like without buybacks? What if Walgreens has continued, or dare anyone even ask “more,” exposure to potential opioid liabilities that have wrecked so much value? If that liability continues as an overhang, Walgreens actually might need the public markets if it has to access capital.

There are many points that can be made about any potential deal-making strategy when it comes to Walgreens. The company has ample resources to raise capital, and recall that Walgreens walked away from a deal to acquire Rite Aid Corp. (NYSE: RAD) after antitrust issues rose, only to acquire about 40% of its store instead. Regulators may have done the Walgreens shareholders a favor.

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It’s no simple task to go out and get a $52 billion acquisition accomplished, and it’s no simple task to put together a premium acquisition price that would prevent a shareholder revolt. How many stocks in the Dow have managed to get acquired or take themselves private?

Anything is possible in this market, but investors who want to buy into Walgreens Boots Alliance better be wanting to own the stock because they think the value in the future will be more all on its own and as a public company. Buying based on hopes of a buyout can of course be profitable if a deal comes, but the “if” seems to be a rather large factor at a time when Wall Street has become so negative that the investing community’s average price target is below where the stock is trading now.

Again, anything is possible. Making a deal of this sort in reality with real-world problems and money is something else.