Walgreens Boots Alliance Inc (WBA)

[Prudent Capitalist]

Most analysts are modeling a LBO of WBA in the $75 - $80 range and correctly pointing out that it would have to be at least in that range to gain shareholder approval. Some really interesting analysis out of Barrons, as detailed be Dow Jones News Wire a couple of days ago:

Walgreens has been one of the most reliable businesses in the U.S. for the past 50 years," Smead says. "It's a massive generator of cash flow that pays out a meaningful dividend and buys back a lot of stock." The company has a nearly 3% dividend and bought back about 7% of its shares in its fiscal year ended in August.

The stock, though, has been out of favor this year amid investor concerns about a flattening in earnings, investment spending, and a potential disruption of the traditional pharmacy business by Amazon.com (AMZN). While higher lately on the buyout speculation, Walgreen shares are well below their 52-week high of $86 set last December.

Barron's wrote Monday that an LBO of Walgreens could be tough to pull off, given the size of deal -- which would be the largest LBO ever -- and the need for a significant amount of equity to finance it.
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Barron's has argued that Walgreens would be an ideal acquisition target for Berkshire as CEO Warren Buffett searches for what he called "an elephant-sized acquisition" using Berkshire's cash hoard of $128 billion.

Berkshire, which declined to comment, could swallow Walgreens whole but also could contribute, say, $10 billion, of equity, either common or preferred stock, to a KKR-led deal. It also could buy the AmerisourceBergen stake held by Walgreens. Walgreens and KKR had no immediate comment.

Berkshire earlier this year bought $10 billion of preferred stock from Occidental Petroleum (OXY) to finance its controversial $57 billion deal to buy Anadarko Petroleum. Walgreens is the kind of enterprise that likely appeals to Buffett given its entrenched position in the pharmacy business and its low valuation in a record stock market. Buffett would have to overcome his aversion to the private-equity business to participate in a Walgreens LBO.

Even with the LBO speculation, Walgreens now trades for just 11 times projected earnings in its current fiscal year ending August 2020, making it one of the cheapest stocks in the Dow Jones Industrial Average. The market multiple is around 18.