According to reports it was announced that Walgreen is willing to go private and the giant buyout firm KKR has decided to approach this deal. On Monday trading 6% surge was noticed in the shares of Walgreens Boots Alliance. The total value of Walgreens exceeds $55 billion and the debt on the balance sheet of this pharmacy giant is $16.8 billion hence the overall cost price goes beyond $70 billion. If KKR successfully approaches this buyout then this could be the largest buyout in history.
As the Walgreens earnings are going down, in the last three days a drop of 26% was noticed in the overall earnings. Since the earnings are not remaining flat, it is a matter of concern. The return on investment should be 9.1% if the earnings remain steady which unfortunately is not the case. This is one of the reasons why this buyout is being criticized.
Paying $70 billion in uncertainty is not a good idea. The lock-in period is uncertain and the fate of the investment is also uncertain and these are the major drawbacks of this buyout. Paying 11 times of the operating income when the earnings are declining, is never a good idea as believed by the experts. Maybe, KKR is planning for a turn-around, in that case, as well such huge buyout has not been made under such circumstances in the past.
Recently Walgreens consolidated with grocer and hammer which are also big retailers but paying such an amount in this condition is still not reasonable for KKR. The reason why KKR is intended to make this investment could be the fact that Walgreens is a huge pharmacy chain in 25 countries with more than 19,000 stores. This factor may give Walgreens stability.
For Walgreens, it is the best possible opportunity to grab the amount as no-one would be willing to pay such an amount in this crisis.