Pessina has spent more than four decades building his pharmaceutical distribution and retail empire through swashbuckling deals. He has been patient, adding to the group piece by piece. But he’s also been opportunistic. With shares in Walgreens down by about 24% over the past year, he may have spotted his chance to extract the group from the public markets.
Indeed, he’s been here before. In 2006, Pessina merged his company Alliance UniChem with Boots. A year later he took the combined group private — with KKR — in a $16 billion deal, Europe’s biggest buyout at the time.
Acquiring Walgreens would dwarf Alliance Boots. It would probably need several financial sponsors and substantial debt funding. Walgreen’s leverage is already fairly high. Net debt will be about 1.8 times Ebitda at the end of the current financial year, according to Bloomberg analyst estimates.
The retail business generates cash. Even so, this might not be the best time to gear up. The Alliance Boots buyout saddled the group with about $12 billion of debt, just as the global economy was hit by the financial crisis. With concerns about a U.S. recession escalating, there’s a risk of history repeating itself.
What’s more, the retail landscape has shifted dramatically over the past decade. Amazon.com Inc. is a much more muscular force than it was in 2007 and seems to targeting the pharmaceutical business. Meanwhile, Walgreens faces other rivals such as Ulta Beauty Inc. in the U.S. and A.S. Watson Group, which owns Britain’s Superdrug.
To keep up, the privately owned company would need to invest, as well as service its debt.
Walgreens also has a huge number of stores, which may need to be pruned. While it might be easier to close shops away from the glare of the public markets, terminating leases is expensive.
Pessina — and more importantly any private equity backers — will need an exit eventually should the buyout succeed. Last time he was able to persuade Walgreens to purchase Alliance Boots. There’s no such obvious contender now. The group could relist on the public market, but potential holders would have to be convinced that the investment case was different this time around.
After conquering the U.S. Pessina has long had China in his sights, and has already made several investments there. It’s possible that he wants to tie up with an Asian operator to create his ultimate goal: a truly global pharmaceutical distribution and retail group. Given the trade tensions between the U.S. and China that might not be so easy right now. But things might look better after five years — a typical private equity holding period.
At 78, some other executives are heading for the beach. But Pessina has shown no signs of slowing down. In fact, another mega buyout may just be the next step in his global ambitions.
--With assistance from Chris Hughes.
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Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.