Published on 03-19-2025
The recent announcement that Walgreens will be taken private by private equity firm Sycamore Partners came as little surprise to Professor Fabrício d’Almeida and his students at the Mitch Daniels School of Business.
It may be coincidence or clairvoyance, but the Daniels School recently asked student teams from five colleges in a case competition whether Walgreens was making the proper move. Teams from Purdue, Indiana University, the University of Illinois, the University of Notre Dame, and Washington University in St. Louis were asked to analyze the pharmacy market and the competitive landscape and determine appropriate valuations in making their recommendations for Walgreens’ decision.
As the hypothetical case becomes a reality in today’s financial markets, how close did the student assessments come to reality? Was the wisdom of the student crowd consistent with the wisdom of the markets?
Professor d’Almeida examines the parallels and contrasts between the student teams’ predictions and the real-world deal by Sycamore Partners:
More Aggressive Debt Use: While the student teams generally predicted moderate levels of debt financing for the acquisition, with debt-to-equity ratios ranging from 4:1 to 7:1, Sycamore Partners’ actual deal used significantly higher leverage of 9:1. This represents a higher-risk, higher-reward approach that is more characteristic of seasoned private equity firms. Sycamore’s $22.5 billion debt financing was substantially greater than the debt levels estimated by the students.
More Conservative Estimates: The student teams took a more cautious approach to both valuation and debt levels, reflecting a conservative strategy given Walgreens’ market volatility. For instance, many students, including the winning IU team, estimated Walgreens’ equity value to be around $9 billion to $10 billion, in line with Sycamore’s actual $10 billion offer. These conservative estimates were likely driven by the uncertainty surrounding Walgreens’ performance, including recent losses and challenges in its restructuring. Similarly, the EBITDA multiples predicted by the students — such as the IU team’s 7x multiple — were generally more reserved compared to Sycamore’s real-world 8x-11x range.
Real-World Operational Strategies: Both in the competition and the actual deal, asset sales and operational restructuring featured prominently as post-acquisition strategies. In their proposals, students predicted Walgreens would sell off non-core assets and restructure its operations to increase efficiency. This was aligned with Sycamore Partners’ real strategy, which included the sale of VillageMD assets and a split of the company into U.S. retail pharmacy, Boots UK, and U.S. healthcare. This commonality underscores the shared recognition of the importance of operational improvements and asset divestitures in enhancing value post-acquisition.
Regarding exit strategies, while the students generally assumed asset sales or IPOs as potential exits, Sycamore Partners’ strategy is focused on a 3-to-7-year exit timeline, involving asset sales, restructuring, and potentially an IPO to achieve deleveraging. The exit multiples reflect Sycamore’s more aggressive approach, with a target of 10x, compared to the 7x exit multiple used in many student projections.
Ultimately, the analysis provided by the students in the competition aligned with Sycamore Partners’ real deal in several respects, particularly regarding premiums paid, EBITDA assumptions, and strategic objectives. However, Sycamore’s strategy was notably more aggressive in its use of leverage and exit multiples, highlighting the riskier approach often taken by experienced private equity firms.
Will Sycamore be any more successful competing against the likes of CVS and Amazon?
Professor d’Almeida acknowledges that while Sycamore Partners could benefit from the flexibility of operating Walgreens as a private company — free from the pressures of quarterly earnings reports — this advantage alone may not be enough to ensure success in competing with dominant players like CVS and Amazon.
Sycamore’s expertise in retail turnarounds, gained through previous acquisitions like Staples and Talbots, may help it identify efficiencies within Walgreens’ operations and reposition the brand. However, the broader competitive landscape presents significant hurdles. CVS, with its acquisition of Aetna, has created a vertically integrated model that combines pharmacy and insurance services, providing a competitive edge that Walgreens would struggle to match. Meanwhile, Amazon’s deep integration of technology, its PillPack pharmacy acquisition, and its unrivaled logistics infrastructure give it a strong foothold in the sector, one that Walgreens may find difficult to compete with, even under new ownership.
Internally, Walgreens faces persistent challenges, including declining revenues, net losses of $8.6 million in fiscal 2024, and the planned closure of 1,200 stores. The debt-heavy structure of Sycamore’s acquisition, with 83% of the deal financed through loans, adds additional pressure on the company’s finances, limiting flexibility for necessary investments such as technology upgrades or store renovations.
Moreover, Sycamore’s track record, which emphasizes cost-cutting and asset sales rather than sustainable growth, raises concerns about its ability to drive long-term innovation at Walgreens. The company’s need for substantial investment to adapt to evolving consumer preferences, especially in digital health and online pharmacy services, remains unmet.
A particularly concerning factor is Sycamore Partners’ history with portfolio companies such as Belk, Nine West and Aeropostale. These companies experienced severe financial distress under Sycamore’s ownership, with Nine West filing for bankruptcy after the closure of 70 stores and mass layoffs. Similarly, Aeropostale’s bankruptcy was attributed, in part, to onerous terms set by a Sycamore-owned sourcing company. This history of failed turnarounds and aggressive, short-term tactics, rather than long-term investments, further casts doubt on Sycamore’s ability to successfully revitalize Walgreens in the long run.
In conclusion, while Sycamore Partners’ acquisition offers potential benefits through the flexibility of private ownership and their retail experience, the competition from CVS and Amazon, combined with Walgreens’ internal challenges and Sycamore’s historical approach, suggests that turning Walgreens into a major competitor will be an uphill battle. Unless Sycamore reimagines its approach and makes significant investments for long-term growth, Walgreens may struggle to keep pace with its more innovative rivals. Time will ultimately tell.
Perhaps in a few years, the Daniels School will host another case competition that asks: Should Sycamore Partners divest of its Walgreens holdings?
The private equity competition created by Professor Fabrício d’Almeida at Purdue’s Daniels School offered an invaluable opportunity for Master of Science in Finance (MSF) students to apply their academic learning in real-world scenarios. Participating in such competitions allows students to engage directly with industry experts and judges, network with professionals, and practice pitching investment ideas — skills crucial for students aiming for top careers in private equity, investment banking, wealth and asset management, and corporate finance. Through events like this competition, the program fosters an environment where students can apply theoretical knowledge to practical situations, building a strong foundation for their future careers.
