The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add graphic.

By Robert Cyran

NEW YORK, March 7 (Reuters Breakingviews) - Executives of struggling companies have a shop-worn line when a buyout comes along: some turnarounds can’t be done in public. Private equity firm Sycamore Partners’ $10 billion deal for drugstore chain Walgreens Boots Alliance WBA.O, announced Thursday night, will test that mantra. Unusually, it gives investors a way to express their confidence over a key item on the clean-up checklist. The early verdict: reasonable doubt.

Walgreens has had a miserable decade. Anyone holding its stock since 2015 would have been nursing losses of over 80% just before the announcement. In-store pharmacies face a squeeze from benefit managers. Insurers are pushing mail-order alternatives. Walmart WMT.N and Amazon.com AMZN.O provide fierce competition in other aisles and fill a growing number of prescriptions.

Attempts to diversify backfired. Walgreens invested $6 billion to take a majority stake in a primary care provider, adding another $3.5 billion in equity and debt for expansion. Last year, it took a $6 billion write-down and shuttered multiple clinics.

Tidying up this mess is a top priority. Walgreens projects that assets including clinic brands Summit Health, CityMD and VillageMD will see revenue fall by $1.4 billion between 2024 and 2026. Still, the hope is that the group’s EBITDA loss turns positive, reaching $100 million.

Walgreens has $3.4 billion of debt extended to VillageMD, accruing steep 19% interest. If the unit and related assets are sold, 100% of proceeds up to the amount owed go to the parent company. From there, 70% flows to shareholders, up to a limit of $2.7 billion total, equivalent to an extra $3 per share.

Yet Walgreens’ stock on Friday morning was trading below the underlying $11.45 per share cash offer, implying investor skepticism. That seems reasonable: to pay off its debt, VillageMD and its brethren would have to garner 34 times next year’s projected EBITDA.

Issues arise elsewhere. Add in debt, legal liabilities and capitalized leases, and the deal is worth nearly $24 billion. To get it done, Sycamore could tap $12 billion of leverage, according to Bloomberg. Assume a 10% interest rate, and interest costs would more than double last year’s total. That would eat into expected operating profit this year of $1.8 billion, according to LSEG data, down from over $7 billion in 2018.

The special trick of taking the company private, such as it is, might simply be easing the path to dismantling it further by splitting out units like UK drugstore Boots. Given apparent doubt over phase one of that plan, though, it’s unclear that private efforts will see any more success than public ones.

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CONTEXT NEWS

Walgreens Boots Alliance said on March 6 it had agreed to sell itself to Sycamore Partners for approximately $10 billion, or $11.45 per share, a 29% premium to the stock's price prior to media reports of a potential deal. Shareholders will also receive a non-transferable right to receive up to $3 a share from the future monetization of Walgreens' debt and equity interests in primary care provider VillageMD.

The company said the total transaction value is up to $23.7 billion based on the immediate cash consideration, potential value from the divestiture, net debt, capital leases, and present value of certain legal liabilities, less the fair value of equity investments.

As part of the deal, Executive Chairman Stefano Pessina will reinvest his 17% stake in the company.

(Editing by Jonathan Guilford and Pranav Kiran)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com;))