Ailing retailers like Walgreens Boots Alliance have scared off even essentially the most daring Wall Road financiers. However that worry has repeatedly confirmed a chance for Sycamore Companions’ Stefan Kaluzny.
The intensely secretive co-founder of the non-public fairness agency has been in a position to make massive bets that Individuals should not carried out with malls and in-person procuring, with few rivals daring to circle.
This week Sycamore, which has sucked up waning manufacturers reminiscent of Staples, Talbots and Ann Taylor regardless of managing solely about $10bn, introduced its largest deal but: a $23.7bn transaction to take Walgreens non-public.
The buyout agency now has to revive a enterprise ravaged by declining prescription drug reimbursements and ecommerce, with 12,500 retailers spanning the US, Europe and Latin America, beneath 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 mentioned of leveraged buyouts within the retail sector. “Oftentimes these offers have much less competitors as a result of [they’re] going the place different folks gained’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 Road veteran recalled.
The subsequent step is attaining a modest buy value. Sycamore has developed a repute for bargaining laborious proper up till signing. In some circumstances — the $6.9bn deal for workplace provides chain Staples, for instance — Sycamore has even pulled off value chips after reaching a handshake on the phrases, in keeping with securities filings and deal insiders.
After touchdown a deal, Sycamore makes aggressive plans to get its fairness funding again rapidly by breaking apart a goal or promoting off actual property to generate rapid money proceeds.
With Staples, Kaluzny quickly separated the patron chain that had been battered by Amazon from the business-to-business section, and offered the corporate’s headquarters to itself in order that it might then acquire lease funds. The end result: a $1bn dividend inside just a few years.
“Sycamore is prepared . . . to get their fingers soiled,” one individual concerned within the Walgreens buyout mentioned.
The agency’s success had much less to do with “good operational strikes” than the very fact they had been “not sentimental” and had been prepared to close down or liquidate enterprise traces rapidly, the individual mentioned. “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 a number of the most advanced turnarounds on Wall Road.
Kaluzny honed his craft at buyout group Golden Gate Capital, earlier than organising 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 a lot of their companies off monitor, creating low cost alternatives for pugnacious traders reminiscent of Apollo International Administration and KKR.
But since then, the strategy has typically struggled.
Investing in retail corporations 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,” mentioned one banker that has labored with Sycamore. “Retail and leverage don’t often work properly. In the event you get the timing mistaken, in case you get the style mistaken, you get your head handed to you.”
One in every of Sycamore’s thornier conditions was its 2014 funding in retail conglomerate Jones Group, the place the buyout agency offered two of the corporate’s most respected 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 non-public fairness group of stripping 9 West of precious belongings, leaving it unable to repay its debt and finally bancrupt. Sycamore settled the dispute in court docket by paying junior bondholders; in alternate, the group obtained releases from future liabilities associated to the buyout.
Three years after 9 West’s chapter submitting, one other Sycamore portfolio firm, non-public division retailer chain Belk, filed for chapter beneath the burden of greater than $1bn in debt after six years beneath the agency’s possession. Sycamore finally ceded management of the corporate to lenders in a restructuring final yr.
Sycamore’s first fund had returned 24 per cent as of the third quarter of final yr, whereas its third fund from 2018 had introduced in 18 per cent, in keeping with an individual acquainted with the returns and public filings. Nonetheless, its second one from 2014 has solely returned 5 per cent.
The non-public fairness group launched a fourth fundraise throughout the second half of final yr which has but to shut, in keeping with an individual acquainted with the matter.
Whereas non-public 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 good about it,” mentioned the lawyer. “They actually scrutinise the belongings and work out methods they will seize worth, in a manner different folks 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, in keeping with folks acquainted with the group’s enterprise technique.
Sycamore finally plans to separate the pharmacy chain into at the least 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 items that might finally change into impartial corporations.
Pulling that off means setting up exact financing preparations for the deal to replicate 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, in keeping with an individual concerned within the deal.
Such a construction offers lenders — which embody non-public credit score agency Ares — a declare on the belongings if the unit defaults on its debt or finally information for chapter.
Cleaving an organization into components will help buyout companies unlock conglomerate reductions and safe a better general payout, and Sycamore is properly practised within the artwork. However there may be nonetheless appreciable work to be carried out 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 stream,” mentioned James Goldstein, the top of US retail at CreditSights.
“I’m certain they’ll push laborious, however have they got higher concepts of methods to repair the pharmacy enterprise than the prevailing administration group or anybody else? I don’t know.”
Further reporting by Sujeet Indap, Antoine Gara and Eric Platt in New York
