Dive Brief:

• Walgreens is considering a potential private equity buyout that would take the drugstore retailer private, according to reports in Reuters, Bloomberg and CNBC that cited anonymous sources. The company did not respond to Retail Dive's request for comment.
• Given Walgreens market cap of roughly $55 billion, a private equity deal for the company would be the largest leveraged buyout in history, according to data compiled by Bloomberg.
• Among the firms reportedly interested is KKR & Co., a private equity firm that in the past has acquired National Vision and Dollar General, and was part of a buyer group that acquired Toys R Us. Some private equity firms have voiced skepticism around a Walgreens buyout, concerned about financing and the deal's feasibility, according to Bloomberg and Reuters.

Dive Insight:

Walgreens may be seeking shelter from a skeptical market for its stock in going private, but the massive debt it would likely take on in a private equity buyout could create its own set of problems if history is any indicator. 

The drugstore retailer has had a bumpy year. Walgreens acknowledged its second quarter — in which retail comp sales fell 3.8% — was "disappointing." It followed that up with another quarter of declining retail comps. For the full fiscal 2019 year, that figure is down 2.4%, as it was the year before, too.

In August, the company announced plans to close 200 U.S. locations, part of an effort to slash $1.5 billion from its budget by 2022. Some of those stores were likely geographic duplicates, but GlobalData Retail Managing Director Neil Saunders said at the time that Walgreens may have neglected the health of some of those stores in the past, leading to sales declines. "In these cases, Walgreens needs to look at its own lack of investment and focus on building a compelling retail proposition," he said.

As weakness showed at Walgreens this year, its stock fell more than 25% from a high point in February to late October. That could give stockholders incentive to sell at a premium, Wells Fargo analysts led by Peter Costa said in an emailed client note. But the deal would still be mind-bendingly expensive, not to mention complicated given that Walgreens already has nearly $17 billion in debt.

The Wells Fargo analysts noted that Walgreens debt-to-EBITDA ratio "isn't high" but also say they believe the company "needs to spend capital for store renovations and to broaden the roll out for its many [joint ventures]." 

They add that these partnerships — including with Kroger, Humana and Jenny Craig — could be accelerated under a privately owned Walgreens, which wouldn't face the pressure to rake in quarterly profits. But, "[t]he flip-side is that capital would be more constrained if [Walgreens] was taken private with too large a debt burden," the analysts said. 

And there's the big risk to Walgreens. Recent history is littered with dead and struggling retailers that took on too much debt in private equity buyouts and failed to adapt to rapidly accelerating competition and technological change.

Walgreens might reduce market scrutiny by going private, but the debt load involved could magnify its retail problems.