Walgreens Boots is exploring a potential buyout

Walgreens Boots Alliance Inc., led by Chief Executive Officer Stefano Pessina, has been reviewing a potential deal to take the company private in what could become the largest leveraged buyout in history, people familiar with the matter said.

The company has recently held informal talks with private equity firms including KKR & Co., the people said, asking not to be identified because the information is private. Pessina is the largest shareholder in Walgreens Boots, whose businesses range from established retail chains in the U.S. and Europe to the lesser-known pharmacy supplier Alliance.

Deerfield, Illinois-based Walgreens Boots has a market value of about $55 billion and $16.8 billion of debt. At that size, a take-private of the company would top the largest leveraged buyout in history: the 2007 sale of utility TXU Corp. to KKR & Co. and TPG, which was worth about $45 billion including debt, according to data compiled by Bloomberg.

Some of the buyout firms have so far shown reluctance to participate in a deal, the people said. It’s unclear how feasible the transaction would be, and the company could decide against pursuing the idea, the people said.

Representatives for Walgreens Boots and KKR declined to comment.

A buyout would give Walgreens Boots time to adapt to a fast-changing retail landscape, free from the quarter-by-quarter demands of public shareholders.

The company is under immense pressure from online competitors including Amazon.com Inc., which have chipped away at front-of-the-store sales of household and beauty items. While top rival CVS Health Corp. has grown into a vertically integrated health-care giant, Walgreens Boots has doubled down on retail, announcing pilot partnerships with retailers including grocer Kroger Co.

It has also announced an ambitious $1.8 billion in annual cost cuts and plans to shutter its in-store health clinics.

The dynamics in Europe, home to the original Alliance and Boots brands, are different. Insurers aren’t pitting pharmacies against each other to lower prescription costs, but Amazon and online pharmacies are changing how consumers buy medicines nonetheless.

Boots, which traces its roots to a family herbal medicine shop in Nottingham in the 1800s, has also suffered from a shopping crisis in the U.K., home to 2,465 of its stores. Sales are falling there and the company cited “challenging” market in a report last month, echoing the pain of other local retailers.

Debt bankers and analysts expressed skepticism about the plan. A takeout by private equity is “no slam dunk” due to how much a potential investor may need to invest and how leveraged a purchase would be, Mizuho’s Ann Hynes wrote in note to clients.

“We are skeptical,” said Bill Zox, chief investment officer for fixed income at Diamond Hill Capital Management, which oversees $22.4 billion in assets including junk-rated debt. “Not just due to size but also due to the current price of the equity, already best-in-class margins in the U.S. business and market-share losses to CVS.”

Walgreens Boots shares rose 2.6% to $61.21 in New York trading on Tuesday after Reuters and Bloomberg reported on the potential take-private. Its bonds dropped the most ever.

This wouldn’t be the first ambitious private equity deal for Pessina, who holds a 16% stake in Walgreens Boots, according to data compiled by Bloomberg.

The native of Italy previously ran Alliance Boots, which he had acquired with KKR in 2007. The transaction came at the height of the buyout boom and underscored the challenges of financing jumbo take-privates, as banks struggled at the time to find buyers for the loans to pay for that deal.

Pessina, 78, took his current role after Walgreen Co. acquired the part of Alliance Boots that it didn’t already own for about $15.3 billion in 2014.

Walgreens Boots is the largest retail pharmacy in the U.S. and Europe, with more than 18,750 stores in 11 countries, according to its most recent annual report. Its wholesale arm has more than 400 distribution centers that deliver to more than 240,000 pharmacies, doctors health centers and hospitals annually. It operates Walgreens and Duane Reade stores in the U.S. and Boots outlets in Europe and Asia. Three-quarters of its revenue stems from the U.S. pharmacy business.

The company had sought to buy rival Rite Aid Corp. In 2017, the companies scrapped the merger amid regulatory concerns that it would hurt competition in the U.S. drugstore market. Walgreens Boots instead bought roughly 2,000 stores from Rite Aid.