Boots owner turns into a headache for veteran dealmaker

When Stefano Pessina orchestrated the sale of Alliance Boots to America’s biggest pharmacy chain a decade ago, he had already solidified his reputation as a master dealmaker.
The pharmacist’s son from Naples got a taste for acquisitions after joining his family’s struggling pharmacy business in his thirties. He rapidly expanded the company through a series of takeovers to form Alliance Santé, merging it with Britain’s Unichem in 1997.
Pessina, now 83, combined the company with Boots, the British chemist chain, to form Alliance Boots in 2006. A year later he teamed up with KKR, the American private equity company, to take the FTSE 100 company private.
His takeover of Boots was not a typical private equity transaction but a case of using KKR as a means to his own end of creating a huge multinational business. From there he went on to orchestrate a tie-up with Walgreens, the US pharmacy retail giant, which first bought a 45 per cent stake in Alliance Boots in 2012 and then acquired the remainder in 2014 for around $15 billion.
Pessina was a big beneficiary of the deal. After it closed, he had amassed a stake of around 20 per cent in the enlarged company, which became Walgreens Boots Alliance (WBA).
However, after around six decades of strategic mergers and acquisitions in the UK, Europe and America to build one of the world’s biggest businesses, cracks are starting to form for the Italian billionaire. The empire he built from scratch is struggling to pull off a turnaround after a costly attempt to become a healthcare business and has become a significant drag on his own fortune.
The market value of Pessina’s holding in WBA has fallen from $3.7 billion to $1.3 billion in the past year, according to FactSet data. Bloomberg estimates the businessman’s net worth at $6.4 billion, down from a high of $15.4 billion in July 2015. At the end of August the stock began trading below $10 a share for the first time since the 1990s.
Analysts have questioned whether Pessina was overly optimistic about his ability to replicate his M&A success in Europe in the US. An attempt to merge with RiteAid, another drugstore chain, was dropped amid competition concerns and WBA ended up buying around 2,000 stores from the rival in 2017 instead.
Since then WBA’s portfolio of around 8,700 US stores has struggled amid increased competition, including from online retailers such as Amazon, and pressure on prescription drug prices.
In 2020 Pessina stepped down as chief executive after five years in charge, during which time the company’s value had more than halved.
Rosalind Brewer, 62, the former chief operating officer of Starbucks, was chosen to replace him and she oversaw the start of a costly pivot into healthcare. Hundreds of US stores were fitted out with doctor’s surgeries and WBA invested in the primary care company VillageMD, before acquiring Summit Health-City MD, the urgent care provider.
Brian Tanquilut, an analyst at Jefferies, said he understood that the strategy of building clinics in stores was aimed at driving foot traffic to boost pharmacy sales. “The problem is, those businesses, they generally lose money and burn cash for the first several years,” he said. “It costs probably $1 million to $2 million to build one and you’re burning capital, right? So it’s very capital intensive.”
WBA then planned to focus more on its home market by selling Boots, which Brewer described as a “nice to have” asset. However, it shelved the sale plan in 2022, citing an “unexpected and dramatic change” in market conditions.
Brewer stood down as chief executive abruptly in August 2023 after slashing the company’s profit forecast. The board then turned to Tim Wentworth, 64, a former executive at Cigna, the healthcare company, to take over as chief executive. He has overseen a $1 billion cost-cutting plan, as well as a push to close underperforming stores and remove multiple mid-level executives.
In June this year, WBA cut its full-year profit forecast. The company reported net losses of $5.6 billion in the nine months to the end of May. It has burnt through cash, reporting $740 million of cash at the end of May, down from $1.1 billion a year earlier.
The results upset a group of shareholders, who filed a lawsuit alleging that the company and some executives overstated revenue and growth expectations ahead of the earnings report in June. This sent shares down by more than a fifth.
On a call with analysts after the results in June, Wentworth admitted the company is “at a point where the current pharmacy model is not sustainable”. He said it had “done some very heavy lifting” to make “meaningful capital reductions and expense reductions”.
He added: “This is not a quick story, but I believe it will be a highly sustained story because the other thing that’s very clear to me in every conversation I have is that a large-scale, community-based, engagement-driven trusted brand has a meaningful role to play in healthcare over the next 20 or 30 years.”
The troubles in the US division creates uncertainty around the future of Boots, which has become one of its high-performing assets. In the third quarter, like-for-like retail sales rose by 6 per cent, the 13th consecutive period in which Boots has grown its market share.
Since aborting the sale plan in 2022, WBA has faced repeated calls to break up its business and concentrate on its home market.
Last year WBA began reconsidering a possible sale or listing of the 1,900-store UK retailer. However, those plans have since stalled. Seb James, who has led Boots for six years, is stepping down next month to run Veonet, one of Europe’s largest chains of ophthalmology clinics and the owner of SpaMedica in Britain.
Insiders insist there are no present discussions around a sale of the business, with WBA actively investing in upgrading Boots’ stores and systems.
Pessina, WBA’s silver-haired, blue-eyed chairman, will no doubt be behind the scenes pushing the executive team hard to try to restore its fortunes. He has a further stake in the outcome of the turnaround plan since he is married to WBA’s chief operating officer, Ornella Barra, 70.
The couple met in 1984. Barra was the owner of a small Italian drug wholesaler, whose company Pessina later bought. He has two children from his first wife, Barbara.
Despite the challenges facing the business, Pessina, a renowned workaholic, still garners loyalty from insiders for his thoughtful and measured leadership style. Those who have worked closely with him often remark on his characteristic long pauses before responding to questions — a habit that, rather than appearing indecisive, is noted as a “charming” trait. This approach is said to reflect his preference for long-term strategy over quick, impulsive decisions.
His base for the past few decades has been a palatial house in Monaco, the low-tax playground for the rich and famous, but Pessina is more likely to be found listening to opera than flashing his wealth around the principality. He is said to eschew the flashy tendencies often associated with business moguls, instead cultivating a reputation for humility and quiet confidence, albeit with an air of “fierceness”.
A WBA executive who works closely with Pessina said: “Stefano is a very remarkable business person. I think he has incredible clarity on the things that matter. We have to remember, businesses always go through moments of flux, but I think Stefano’s been pretty sure-footed, pretty much all the time.”
Progress on WBA’s turnaround plan should become clearer later this month when it publishes its next quarterly results on October 15. Analysts are expecting WBA to post sales of $35.7 billion, up from $35.4 billion a year earlier.
They will be looking for an update on the company’s progress in achieving $1 billion in cost savings in 2024, as well as further signs that it can gain traction in the US healthcare business by building partnerships. This year it agreed a tie-up with a public information initiative to offer free rapid HIV testing. It also entered into a partnership with Boehringer Ingelheim, the German pharmaceutical company, to help make clinical trials more accessible.
Analysts at Zacks, a Chicago-based investment research firm, which has put a “sell” recommendation on the stock for short-term investors, said in a note published this week that the “long-term growth model looks encouraging”.