Ailing retailers like Walgreens Boots Alliance have scared off even probably the most daring Wall Avenue financiers. However that worry has repeatedly confirmed a possibility for Sycamore Companions’ Stefan Kaluzny.
The intensely secretive co-founder of the personal fairness agency has been in a position to make huge bets that People are usually not executed with malls and in-person procuring, with few rivals daring to circle.
This week Sycamore, which has sucked up waning manufacturers comparable to Staples, Talbots and Ann Taylor regardless of managing solely about $10bn, introduced its largest deal but: a $23.7bn transaction to take Walgreens personal.
The buyout agency now has to revive a enterprise ravaged by declining prescription drug reimbursements and ecommerce, with 12,500 shops spanning the US, Europe and Latin America, below manufacturers together with Walgreens, Boots, Duane Reade and Benavides. Many friends see the shops as unsalvageable.
“It’s not for the faint of coronary heart,” one lawyer who has labored with Sycamore stated of leveraged buyouts within the retail sector. “Oftentimes these offers have much less competitors as a result of [they’re] going the place different individuals received’t contact with a 10-foot pole.”
Kaluzny’s well-worn playbook begins with the intricate dossiers Sycamore maintains on a whole bunch of US retail chains, one Wall Avenue veteran recalled.
The following step is reaching a modest buy worth. Sycamore has developed a repute for bargaining exhausting proper up till signing. In some circumstances — the $6.9bn deal for workplace provides chain Staples, for instance — Sycamore has even pulled off worth chips after reaching a handshake on the phrases, based on securities filings and deal insiders.
After touchdown a deal, Sycamore makes aggressive plans to get its fairness funding again shortly by breaking apart a goal or promoting off actual property to generate fast money proceeds.
With Staples, Kaluzny quickly separated the patron chain that had been battered by Amazon from the business-to-business phase, and bought the corporate’s headquarters to itself in order that it may then acquire lease funds. The consequence: a $1bn dividend inside a couple of years.
“Sycamore is prepared . . . to get their fingers soiled,” one individual concerned within the Walgreens buyout stated.
The agency’s success had much less to do with “sensible operational strikes” than the actual fact they had been “not sentimental” and had been prepared to close down or liquidate enterprise traces shortly, the individual stated. “They’re prepared to play hardball.”
Sycamore and Kaluzny declined to remark.
Such high-stakes gambits are typical of an investor seen by friends as a brutally robust negotiator with a abdomen for among the most complicated turnarounds on Wall Avenue.
Kaluzny honed his craft at buyout group Golden Gate Capital, earlier than establishing Sycamore in 2011. It was a wealthy time to purchase brick-and-mortar retailers: procuring centres had been nonetheless stuffed with foot visitors and the 2008 monetary disaster had knocked lots of their companies off observe, creating low-cost alternatives for pugnacious traders comparable to Apollo World Administration and KKR.
But since then, the strategy has typically struggled.
Investing in retail firms with hulking actual property footprints and 1000’s of workers will be treacherous, and when retailers fail, they don’t collapse quietly.
“Non-public fairness companies have misplaced a lot cash in retail,” stated one banker that has labored with Sycamore. “Retail and leverage don’t often work properly. In the event you get the timing improper, if you happen to get the style improper, you get your head handed to you.”
One among Sycamore’s thornier conditions was its 2014 funding in retail conglomerate Jones Group, the place the buyout agency bought two of the corporate’s most dear manufacturers — Stuart Weitzman and Kurt Geiger — to a different entity it managed.
It renamed the rump of the enterprise 9 West, which filed for chapter in 2018, and sparked a authorized brawl.
Collectors accused the personal fairness group of stripping 9 West of invaluable property, leaving it unable to repay its debt and finally bancrupt. Sycamore settled the dispute in courtroom by paying junior bondholders; in change, the group obtained releases from future liabilities associated to the buyout.
Three years after 9 West’s chapter submitting, one other Sycamore portfolio firm, personal division retailer chain Belk, filed for chapter below the load of greater than $1bn in debt after six years below the agency’s possession. Sycamore finally ceded management of the corporate to lenders in a restructuring final 12 months.
Sycamore’s first fund had returned 24 per cent as of the third quarter of final 12 months, whereas its third fund from 2018 had introduced in 18 per cent, based on an individual aware of the returns and public filings. Nonetheless, its second one from 2014 has solely returned 5 per cent.
The personal fairness group launched a fourth fundraise through the second half of final 12 months which has but to shut, based on an individual aware of the matter.
Whereas personal fairness titans like Blackstone and KKR have usually walked away from retail buyouts, Sycamore — and Kaluzny — has caught round.
Kaluzny has run the agency on his personal since 2022, when his co-founder Peter Morrow departed. “Stefan’s sensible about it,” stated the lawyer. “They actually scrutinise the property and work out methods they will seize worth, in a method different individuals couldn’t.”
With Walgreens Boots, the 90 per cent drop within the firm’s market capitalisation prior to now decade spells alternative.
US pharmacy chains have suffered from a punishing mixture of flagging gross sales and steeper prices, and Walgreens has been no exception.
The buyout group will try to show the enterprise round through the use of the identical recreation plan it has utilized to different targets in its 14 years of shopping for manufacturers, based on individuals aware of the group’s enterprise technique.
Sycamore finally plans to separate the pharmacy chain into no less than three companies, the Monetary Instances beforehand reported. The corporate’s US pharmacy retailer Walgreens, its British retail arm Boots, and the speciality pharma unit Shields Well being Options are among the many models that might finally turn into impartial firms.
Pulling that off means putting in exact financing preparations for the deal to mirror the differing prospects of the companies, one of many causes the buyout took months to barter.
Lenders to the US retail enterprise, for instance, required Sycamore to safe the debt with stock, together with prescribed drugs, based on an individual concerned within the deal.
Such a construction provides lenders — which embody personal credit score agency Ares — a declare on the property if the unit defaults on its debt or finally information for chapter.
Cleaving an organization into components might help buyout companies unlock conglomerate reductions and safe the next general payout, and Sycamore is properly practised within the artwork. However there’s nonetheless appreciable work to be executed whipping components of Walgreens’ core enterprise into form for potential future consumers.
“Presumably Sycamore’s going to be centered on cost-cutting and cost-reduction to enhance money circulation,” stated James Goldstein, the pinnacle of US retail at CreditSights.
“I’m positive they’ll push exhausting, however have they got higher concepts of tips on how to repair the pharmacy enterprise than the present administration group or anybody else? I don’t know.”
Further reporting by Sujeet Indap, Antoine Gara and Eric Platt in New York