Down 89%, Should You Buy the Dip on Walgreens Boots Alliance?

Walgreens Boots Alliance (NASDAQ: WBA) is in a pending acquisition with Sycamore Partners, a private equity firm, to take the struggling pharmacy chain private. It could end a years-long struggle for the company, which has tried to adapt to modern times and shrinking foot traffic in its stores.

It would be an understatement to say Walgreens has dipped; the stock is down 89% from its high. Most people who have bought and held these shares over the past decade haven't done well.

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However, there is an opportunity. Investors could profit from the spread between the stock's current share price and the agreed amount Sycamore Partners might ultimately pay once the transaction finalizes. Does this opportunity's potential 36% return make Walgreens worth buying?

Here is what you need to know.

A short-term opportunity that could return up to 36%

Walgreens is poised to go private later this year once the deal closes for private equity firm Sycamore Partners to acquire Walgreens. The deal stipulates that Walgreens shareholders will receive $11.45 per share in cash as payment. As of this writing, Walgreens trades at $10.60, an 8% difference. In other words, buying the stock now would net you an 8% gain, assuming the acquisition closes.

However, there's a provision that shareholders could receive an additional amount, up to $3 per share, depending on efforts to sell Walgreens' debt and primary care assets, including its equity in the Village Medical, Summit Health, and CityMD businesses. The additional $3 per share would bump the per-share buyout amount to $14.45, a 36% profit from the current share price.

Why does this gap exist?

Walgreens traded at $8.85 on Dec. 9, 2024, before reports about a potential buyout emerged. Naturally, the market adjusted to the deal and terms following the announcement. So, why is there still a price gap?

You could think of the stock market as a sports book placing odds on the Walgreens acquisition closing. The stock's current share price is closer to the baseline buyout number ($11.45) than where it traded before the deal announcement ($8.85). Therefore, the market believes the deal is more likely than not to close.

Yet, there is some wiggle room because the deal hasn't closed, and you never know what might happen. Even if it's unlikely, there's at least a possibility that the deal could fall apart for whatever reason, and that's why Walgreens isn't trading at its full buyout price. There have been instances of multibillion-dollar mergers and acquisitions falling apart before closing, so investors should never dismiss the possibility.

It might not be worth the risk

The burning question is whether investors should try to make an easy profit on Walgreens here.

First, consider that the 36% return is a best-case scenario, and the final payout could fall short of that, though it's hard to say by how much. The sudden volatility in the financial markets could sour the market's appetite for Walgreens' debt and assets, resulting in no deal, or, if there is a sale, a lower price than hoped.

That's why investors should focus on the baseline buyout price of $11.45. That approximate 8% gap is the low-hanging fruit. If it turns out better, that would be great, but setting high expectations could be a mistake. Meanwhile, if the deal were to fall through, the stock would likely drop back to its $8.85 level, or worse, considering the rising fear in the market.

In this increasingly volatile market climate, I don't think it's worth it, and I'd rather buy high-quality stocks at lower prices. At the end of the day, individuals would do best to adhere to the Motley Fool philosophy of being a long-term-minded investor -- thinking about where a company will be at least five years down the road.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.