Reports have suggested the chain could be worth as much as £10bn in a spin-off by Walgreens. What’s it really worth and who might buy?

The reported exploration by US pharmacy giant Walgreens of a sale of historic high street brand Boots has been touted as potentially one of the largest UK retail deals in history.

Sky News, which first broke the story, speculated the chain could be worth as much as £10bn – dwarfing this year’s £6.8bn deal for Asda and £7.1bn delisting of Morrisons.

However, retail sources suggest the reality of the move may prove less glitzy as the 2,200-store brand does not have an easy pathway to obvious and meaningful investor returns.

Once the subject of the UK’s biggest-ever leveraged buyout, when Italian-born billionaire Stefano Pessina teamed up with KKR to buy Alliance Boots for £11bn in 2007 before it became part of Walgreens Boots Alliance in 2014, the UK chain has been a slightly unloved part of the Walgreens empire in recent years.

Even as the UK retailer reliably churned out dividends for its parent company, a lack of investment in its tired estate, mounting competition from supermarkets, discounters and online, and a structural decline in the high street have significantly reduced its cache.

The chain “has been facing massive structural issues for 30 years”, says one former Boots executive, pointing to declining footfall, increased competition and its primarily “old and declining” leasehold estate on onerous terms.

“The result of that is ever-increasing pressure on the P&L, meaning it has continued to raise prices, which exacerbates the core problem,” he says. “Prices creep up until one day you are dead because customers notice that.”

“Mid-market retailing is a very difficult place to be in any sector,” says Patrick O’Brien, UK retail research director of Global Data. “People are trading down, and often looking at more fashionable brands when looking to treat themselves to more expensive beauty products. Boots’ pricing is a bit awkward: it has a very good loyalty program, but this has to be paid for and does not compete so well at shelf end pricing.”

This top and bottom line challenge was exacerbated by covid, which saw sales almost halve at the height of UK lockdowns and the chain plunge to a £258m annual loss as revenues fell by more than 10%.

Although Boots traded through lockdown, a collapse in shopper numbers and an inability to compensate through its online operation, as well as costs associated with store closures and job cuts, hit performance.

Walgreens, for which Boots now only makes up around 5% of sales, took a $2bn hit on the value of the chain, reflecting its struggles.

As well as finding its retail operations under pressure, the wider UK pharmacy industry has suffered from government funding cuts, making pharmacy services – which account for around a third of Boots’ sales – fundamentally unprofitable.

Deliveroo Boots

The retailer partnered with Deliveroo in August 2021 for on-demand deliveries

Genuine value

All of this leaves some of the figures quoted in the press for the business looking almost fanciful. Industry observers tell The Grocer any sale price for the chain is likely to be significantly lower, with two suggesting the genuine value is closer to £2bn-£3bn.

So why would Walgreens sell a reliable cash generator for a potentially discounted price?

First, Boots no longer fits into its strategic vision as it looks to shrink its sprawling operations and re-focus on North America.

Second, its non-core UK business has been a headache for a number of years – but there are green shoots of recovery after Walgreens loosened the purse strings, and Boots has recovered significantly from the hit of Covid, making a sale easier.

Under the management of MD Sebastian James, like-for-like sales were back up 12.8% in its most recent quarter, albeit from a low base, while it is making progress online, with e-commerce sales double pre-pandemic levels despite the rebound in stores.

Walgreens has backed James by increasing spend on to cope with increased traffic, and invested £300m into its store estate, as well as funding the opening of 100 beauty halls, with another 50 planned. With some of the dirty work already done on its estate, including the shuttering of about 200 stores since 2019 and the loss of 6,500 jobs, Boots may be emerging from Covid stronger than it entered the crisis.

Third Bridge analyst Ross Hindle points to an opportunity to tap increased demand for medical services amid huge pressures in UK healthcare.

“A slow migration towards services on the pharmacy side is the key for future growth,” he says. “The current pressure on the NHS, including the shortage of doctors due to Brexit, has forced the NHS to use pharmacists to deliver basic healthcare services. The experts we talk to believe this will become more prevalent and will be a major boost for pharmacies.”

However, he suggests realising this opportunity will require investment from any new owner, with funding also required to grow its digital presence and modernise its estate.

“Prices creep up until one day you are dead because customers notice”

This suggests opportunities for a private equity quick win are limited – particularly given that most stores are leasehold so could not be sold off and used to fund such a buyout.

One former Boots exec notes that a mass shutdown of less glamorous regional locations is also problematic, given they contribute to the balance sheet.

A standalone Boots could also find itself less competitive without the purchasing power of Walgreens, while Hindle points out its parent also owns key brands such as No7, which could complicate distribution.

“It’s a solid, if neglected business that still throws off a fair bit of cash,” says Shopfloor Insights retail analyst Bryan Roberts. “The most likely outcome will be private equity, although 20-year-old rumours about a UK grocer going for it have resurfaced.”

One senior City source acknowledges there is a “good strategic rationale” for supermarkets to push into the health & beauty sector given limited scope for meaningful expansion within grocery.

The recent Morrisons and Asda PE buyouts would seem to rule them out, while Sainsbury’s efforts to refocus on grocery would also not seem to make it a natural fit.

That has left some to point at Tesco. However, the City source plays down the idea CEO Ken Murphy’s previous role at Boots will tempt him to make a move. “Ken knows WBA and Boots very well, so that should give him many reasons not to buy it,” the dealmaking source says. “I do get the one engine, multiple business model thinking, but there have to be better ways, smarter ways and less risky ways to do it.”

Even if a strategic fit with Tesco made sense, competition issues seem insurmountable, given their number one and two position in numerous categories, and the estate overlap.

“I’d be surprised if the CMA let Tesco get away with buying Boots, but they let them get away with Booker,” observes retail analyst Nick Bubb.

Another possibility is a Boots IPO – though the market’s lack of love for bricks and mortar retailers would test appetite.

Whatever the outcome, there is a sense at least that Boots is getting back on the front foot.

As one key supplier tells The Grocer: “Seb James and Steve Ager have brought real energy to Boots in the last 18 months… They are as good a management team as any I’ve encountered.”

How much that progress is worth in cold, hard cash remains to be seen.