Why won’t Boots bidders meet Walgreens’ £7 billion price tag?

Boots for sale
A For Sale has been hoisted above Boots

The Boots sale process is nearing a close with final round bids due this month. However, owner Walgreens Boots Alliance (WBA) could be left out of pocket with rumours swirling that the winning bid may be substantially below the £7 billion price tag it was eyeing for the UK’s largest chemist chain.

The US company acquired Boots back in 2014 for £9bn but could be selling it for a steep discount after it emerged that one of the interested parties, the consortium of private equity firms CVC and Bain, which ultimately withdrew from takeover talks last month, would only pay £4 billion for Boots.

This is especially significant as CVC’s UK chief Dominic Murphy is a Walgreens board member and has spent 15 years working with Boots.

But why exactly is Boots’ current valuation so low?

Globaldata sector head for health and beauty Sofie Willmott believes that WBA aim of achieving £7 billion was very punchy given the market capitalisation of the wider company and Boots’ contribution in terms of sales and profits.

“Assigning Boots a market value of £4 billion would be around 12% of WBA’s market capitalisation, when Boots contributed around 6% of sales to WBA in FY2021 and around 5% of profits (when Boots was last profitable in FY2019),” she says.


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Willmott adds that when WBA bought Boots for £9 billion back in 2014, it would have had high hopes for the UK’s biggest health & beauty retailer but that since then, Boots has lost market share to grocers and discounters.

Any new owner would also need to plough money into the health and beauty business, which Wilmott says has a “hefty store estate in need of investment”.

Meanwhile, the timing of the sale in the middle of the worst cost-of-living crisis in decades, will not help Boots’ valuation.

“We expect this year to be tough for the retailer with shoppers’ squeezed budgets meaning discounters are more appealing places to shop for health and beauty products,” Willmott says.

“Despite this, Boots remains the number one retailer for health & beauty shoppers in the UK and its solid brand reputation and convenient store locations makes attractive to bidders.”

Retail analyst Nick Bubb says that Stefano Pessina, executive chairman of Walgreens Boots Alliance, always thinks his businesses are worth more than the market thinks.

He adds that while CVC and Bain are thought to have valued Boots at only £4 billion, other parties may well disagree.

However, in his opinion, “£7bn always felt optimistic” as Boots is “a mature and under-invested business.”

Pre-sale bluster?

One retail M&A expert said it was hard to tell if WBA would be disappointed with a reduced price tag and questioned whether the £7 billion figure bandied around was “just bluster” to instigate a bidding war.

“The vendor in any transaction will always feed stories to the press about how much a company is worth, which are highly inflated; and then prospective buyers will start by lowballing before bidding up,” he says.

The M&A expert says the reality may be that Boots’ true valuation may sit in between the £7 billion mooted by WBA and the £4 billion suggested by CVC and Bain.

“Sainsbury’s has a market cap of under £6bn – or £11bn enterprise value. This suggests an EBITDA multiple of around 8x. Applying the same multiple to Boots, my back-of-fag-packet calculation suggests that it is worth £5.5bn – exactly half way between the mooted £4 and £7 billion.”
“Now, whether you think Boots should be valued the same as Sainsbury’s is another question,” he adds.
With final bids around the corner, and the possibility of India’s richest man Mukesh Ambani, owner of Reliance Industries, entering the race at the last minute, there is not long to wait until the true value of Boots is revealed.

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