Disease retailers like Walgreens Boots Alliance are scared even by the boldest Wall Street investors. But that fear repeatedly proves the opportunity of Stefan Kaluzny of Sycamore Partners.
The fierce secret co-founder of the private equity company was able to make a big bet that Americans weren’t shopping at the mall or in-person.
This week, Sycamore siphoned declined brands like Staples, Talbot and Ann Taylor, despite only managing around $10 billion, but announced a $23.7 billion deal to make Walgreens private.
Buyout companies must revive businesses that have been destroyed by prescription drug rebates and decline in e-commerce, spanning 12,500 outlets across the US, Europe and Latin America under brands that include Walgreens, Boots, Duane Reed and Benavidez. Many peers view the store as a bargain.
“It’s not for the faint hearted person,” one lawyer who worked with Sycamore said of the leveraged acquisition in the retail sector. “In many cases, these deals are because there’s less competition because they go where others don’t touch the 10-foot pole.”
Kaluzny’s worn-out playbook starts with the complicated actors where Sycamore maintains hundreds of US retail chains, recalled the Wall Street veteran.
The next step is to achieve a modest purchase price. Sycamore has built a reputation for negotiating vigorously until they sign it. In some cases, for example, $6.9 billion in office supplies chain staples pulled away price tips after reaching handshakes for terms, such as Chain Staples.
After signing the agreement, Sycamore has an aggressive plan to quickly regain stock investments by splitting the target or selling the property to generate immediate cash revenue.
With Staples, Kaluzny quickly separates the Amazon-abused consumer chain from its business-to-business segment, selling its headquarters to itself, allowing it to collect lease payments. Results: A billion dollar dividend within a few years.
“Sycamore is pleased… said one person involved in the acquisition of Walgreens.
The company said its success had nothing to do with “glorious operational moves” than the fact that it was “not sentimental” and was willing to close or liquidate its business line any time soon. “They are happy to play hardball.”
Sycamore and Kaluzny declined to comment.
Such high stakes gambits are typical of investors that their peers have seen as cruelly tough negotiators with stomachs due to some of Wall Street’s most complicated turnarounds.
Before establishing Sycamore in 2011, Kaluzny honeed his craft with Buyout Group Golden Gate Capital. It was a great time to buy a physical store. The shopping centres are still full of pedestrians, and the 2008 financial crisis knocked out many businesses and created cheap opportunities for Pugnasious investors such as Apollo Global Management and KKR.
But since then, the approach has been struggling at times.
Investing in a retailer with real estate footprint and thousands of employees can be dangerous and if retailers fail, they don’t crumble quietly.
“Private equity companies have lost a lot of money in retail stores,” said one banker who worked with Sycamore. “Retail and leverage usually don’t work well. If the timing is wrong, if the fashion is wrong, then I’ll pass my head on.”
One of Sycamore’s thorny situations was an investment in the retail conglomerate Jones Group in 2014, with the acquisition company selling two of the most valuable brands of the two companies, Stuart Weitzman and Kurt Geiger.
It filed for bankruptcy in 2018 and renamed it Business Nine West Lump, which caused a legal brawl.
Creditors denounced the private equity group for stripping the nine West of their valuable assets, unable to pay off their debts, ultimately becoming insolvent. Sycamore settled the dispute in court by paying lower bonds. In exchange, the group received releases from future liabilities related to the acquisition.
Three years after Nine West’s bankruptcy filing, another Sycamore portfolio company, private department store chain Belk, filed for bankruptcy on the weight of more than $1 billion in debt under the company’s ownership of more than six years. Sycamore ultimately handed over the company’s management to lenders in a restructuring last year.
Sycamore’s first fund returned 24% as of the third quarter last year, while the third fund from 2018 brought 18%, according to those familiar with returns and disclosure. However, the second one in 2014 only returned 5%.
Private Equity Group launched its fourth funding that has not yet been closed late last year, according to anyone familiar with the issue.
Private equity titans like Blackstone and KKR are generally separated from retail acquisitions, but Sycamore and Kaluzny are stuck.
Kaluzny has run the company himself since 2022, when his co-founder Peter Morrow departed. “Stefan is smart about that,” the lawyer said. “They really scrutinize their assets and find ways to capture value in ways others couldn’t.”
With Walgreens Boots, a 90% decline in the company’s market capitalization over the past decade shows off the opportunity.
US pharmacy chains suffer from a combination of flagging sales and a punishing combination of sudden costs, and Walgreens is no exception.
According to those familiar with the group’s business strategy, the acquisition group tries to turn the business around by using the same game plan that it applied to other goals in the 14-year purchase brand.
Sycamore is ultimately planning to split the pharmacy chain into at least three businesses, the Financial Times previously reported. The company’s US pharmacy retailer Walgreens, the UK retail arm boots, and the specialized Pharma Unit Shields Health Solutions are one of the units that could ultimately become an independent company.
To pull it out means introducing an accurate financing arrangement for transactions to reflect differences between companies, one of the reasons the acquisition took months to negotiate.
For example, lenders in the US retail business have requested Sycamore to secure debt with inventory, including prescription drugs, according to those involved in the transaction.
Such a structure gives lenders, including private credit companies ARE, a claim against the assets if the unit defaults on its obligation or ultimately defaults the file due to bankruptcy.
Shading the company into parts helps businesses unlock conglomerate discounts and protect their overall payments more, and Sycamore is well practiced with this art. However, for potential future buyers, there is still considerable work to shape a part of Walgreens’ core business.
“Perhaps Sycamore will focus on cost savings and cost savings to improve cash flow,” said James Goldstein, American retailer at Creditsights.
“I’m sure they’ll push hard, but do they have better ideas about how to fix the pharmacy business than their existing management team or anyone else? I don’t know.”
Additional reports from Sujeet Indap, Antoine Gara and Eric Platt in New York
