With its shares falling more than 80% over the last three years alone, investors are likely eager for a major shakeup in the way that Walgreens Boots Alliance (WBA -0.62%) does business. If the rumors are to be believed, that shakeup could be coming very soon, and it would affect every shareholder.
But does that make the stock worth buying? Let's look at what's possible here and figure it out.
Why this potential big change could be for the better
Before addressing the rumor in question, it's worth taking a minute to review the state of Walgreens today.
Its trailing 12-month (TTM) normalized diluted earnings per share (EPS) are down close to 1% over the last five years, reaching $3.77. In the most recent quarter, its fiscal fourth quarter, management blamed a bevy of issues, including reimbursement pressure from health insurers and a worse-than-anticipated retail environment in the U.S. But that probably does little to reassure investors, as those (transient) problems weren't in play during late 2022 through mid-2023, when Walgreens reported losses instead of earnings.
WBA Revenue (TTM) data by YCharts.
To fight the ailing margins of its core pharmacy business, the company realized more than $1 billion in cost savings in its fiscal 2024, and it also reduced capital expenditures by $600 million. It aims to close around 1,200 of its pharmacies over the next three years, including 500 in 2025 alone. Those two initiatives may shore up the bottom line, although the effect will not be immediate, and they will cause lost revenue. So the company will most likely be smaller, but also more robust, in the near future than it is today.
Finally, it has $28.9 billion in long-term debt and capital lease obligations. While it paid off $30.4 billion in long-term debt in the TTM period, it also took out another $31.3 billion, so it became more indebted overall. That puts its total debt-to-equity ratio at 277.9%, which is very high, indicating that it may struggle to repay its obligations.
In situations where public companies are heavily indebted despite owning considerable real assets, private equity (PE) groups sometimes swoop in to the rescue, laying out enough cash to take the company private, and then either gutting it or taking action to make it more efficient. On Dec. 11, The Wall Street Journal reported that Sycamore Partners, a PE business, was in talks with Walgreens about buying it. That made the stock fly upward by around 20%.
But would such an acquisition make the stock a buy?
There's not much of a thesis here
If Sycamore ends up agreeing to purchase Walgreens with the goal of taking it private, shareholders will almost certainly have to vote on whether to proceed.
Assuming they vote to proceed, shareholders will then likely get paid out for their shares when the transaction closes. While it's possible that the payout will be at a premium relative to the price of Walgreens' shares at the time of the deal's closing, the premium would probably not be large enough to be worth buying the stock in advance, especially if working out the details takes a couple of quarters during which the price falls further.
So there's not much of an investment thesis for buying the stock based on this rumor. Remember, there's no way for the PE group to make the company more efficient until there's a transaction of some kind, so there's no driver of higher earnings in play, aside from whatever management is currently planning.
However, shareholders whose investments are currently losing value should be encouraged by the possibility of a stock price surge upon a deal announcement, even before official approval. In the absence of a sustained recovery, it might be the best opportunity to make an exit.
