Private Equity's High-Stakes Gamble: Assessing Risk in Leveraged Buyouts Through the Walgreens Case Study

In the volatile landscape of 2025, leveraged buyouts (LBOs) remain a double-edged sword for private equity. While they enable aggressive restructuring of underperforming assets, the reliance on high debt levels and macroeconomic fragility has amplified systemic risks. The Sycamore Partners acquisition of Walgreens Boots Alliance—a $23.7 billion deal financed with 83% debt—exemplifies both the potential and perils of this strategy. For investors, the case underscores the need to scrutinize capital structures, operational resilience, and exit strategies in an era of geopolitical and regulatory uncertainty.

The LBO Landscape in 2025: A Delicate Balance

According to a report by McKinsey & Company, global private equity deal values surged 15% in the first half of 2025 despite a 9% decline in deal volumes, reflecting a shift toward larger, more strategic transactions [1]. This trend aligns with the Walgreens deal, where Sycamore’s $23.7 billion buyout—largely funded by banks like UBS and JPMorgan—represents a high-stakes bet on retail revitalization [2]. However, the macroeconomic backdrop complicates such ventures. Elevated tariffs and trade tensions have introduced volatility, as seen in April 2025 when tariff announcements triggered a 200-basis-point widening in leveraged loan spreads [3].

The capital stack in LBOs further compounds risk. Sycamore’s Walgreens deal includes layers of senior debt, mezzanine financing, and high-yield bonds, each with distinct risk-return profiles [4]. This complexity is exacerbated by the firm’s reliance on private credit, which, while offering flexibility, lacks the transparency of traditional banking. As noted in a 2025 PwC analysis, such structures can obscure true valuation metrics and delay exit opportunities, forcing firms to rely on continuation funds or dividend recapitalizations [5].

Walgreens: A Case Study in High-Leverage Restructuring

Sycamore’s acquisition of Walgreens—a company whose market value had plummeted from $100 billion to a fraction of that peak—highlights the firm’s penchant for distressed retail assets. The deal, approved by 96% of shareholders in July 2025, includes a $11.45-per-share cash payout and a contingent $3-per-share "Divested Asset Proceeds Right" tied to the sale of VillageMD clinics [6]. This structure allows Sycamore to defer value realization while minimizing upfront equity commitments.

Post-acquisition performance, however, reveals mixed signals. In Q3 2025, Walgreens reported a $175 million net loss, driven by tax expenses and reduced equity earnings in Cencora, despite a 7% year-over-year sales increase to $39 billion [7]. The U.S. Retail Pharmacy segment showed resilience, with $350 million in adjusted operating income from cost-cutting measures, but grocery and household sales declined 5.3% [8]. Sycamore’s restructuring plan—announced in October 2024—calls for 1,200 store closures over three years, with 500 slated for 2025 alone [9]. While these closures aim to improve cash flow, they risk alienating customers and eroding brand equity in a competitive retail sector.

Investor Risks and Systemic Implications

The Walgreens case exemplifies broader risks in private equity’s LBO playbook. A 2025 Protiviti report identifies elevated interest rates, inflationary pressures, and regulatory scrutiny as top risks for private equity, all of which are amplified in high-debt scenarios [10]. Sycamore’s 83% debt financing exceeds the average 41% leverage in LBOs, raising concerns about default risks during economic downturns [11]. Analysts warn that over-leveraged companies like Walgreens could become systemic vulnerabilities, particularly in sectors where private equity dominance is growing [12].

Moreover, the reliance on continuation vehicles and secondary buyouts introduces opacity. Sycamore’s decision to split Walgreens into five standalone entities—Walgreens, Boots, Shields Health Solutions, CareCentrix, and VillageMD—aims to streamline operations but complicates valuation transparency [13]. This fragmentation may deter potential buyers, prolonging exit timelines and pressuring Sycamore to rely on creative strategies like dividend recapitalizations.

Navigating the Future: Lessons for Investors

For investors, the Walgreens acquisition underscores the importance of rigorous due diligence. Key metrics to monitor include:
1. Debt Serviceability: Walgreens’ Q3 2025 results showed a 7% sales growth but a $175 million loss, highlighting the fragility of cash flows under high leverage [14].
2. Operational Turnaround: The success of 1,200 store closures and cost-cutting initiatives will determine whether Sycamore’s strategy delivers value or accelerates decline [15].
3. Exit Viability: With limited public market exits and a saturated private equity landscape, Sycamore’s ability to monetize VillageMD or other assets will be critical [16].

Analyst projections for Walgreens’ post-acquisition performance are cautiously optimistic. A median price target of $11.45 (current price: $11.98) suggests a neutral outlook, with Lisa Gill of JPMorgan projecting a 25.2% upside and Allen Lutz of B of A warning of an 8.2% downside [17]. These divergent views reflect the uncertainty surrounding Sycamore’s ability to balance cost-cutting with innovation in a sector increasingly scrutinized for its social impact [18].

Conclusion

The Sycamore-Walgreens deal encapsulates the high-stakes nature of modern LBOs. While private equity’s focus on operational efficiency and strategic restructuring can unlock value, the risks of over-leveraging, macroeconomic volatility, and opaque exit strategies remain significant. For investors, the key lies in balancing the potential for outsized returns with a sober assessment of downside risks—a lesson as relevant to Walgreens as it is to the broader private equity ecosystem in 2025.

Source:
[1] Global Private Markets Report 2025 [https://www.mckinsey.com/industries/private-capital/our-insights/global-private-markets-report]
[2] Sycamore Partners to finance Walgreens buyout with 83% debt [https://pestakeholder.org/news/sycamore-partners-to-finance-walgreens-buyout-with-83-debt/]
[3] Leveraged Finance Asset Allocation Insights: 2Q25 [https://www.pinebridge.com/en/insights/leveraged-finance-asset-allocation-insights-upside-remains-after-performance]
[4] Leveraged Buyouts: Strategies and Risks in Private Equity [https://digitaldefynd.com/IQ/leveraged-buyouts-strategies-and-risks-in-private-equity/]
[5] Private Equity Mid-Year Trends in 2025 [https://www.cbh.com/insights/reports/private-equity-mid-year-trends-in-2025/]
[6] Walgreens shareholders approve $10B Sycamore buyout [https://www.retaildive.com/news/walgreens-shareholders-approve-sycamore-take-private-acquisition/752911/]
[7] Walgreens Boots Alliance Reports Fiscal 2025 Third Quarter Results [https://investor.walgreensbootsalliance.com/news-releases/news-release-details/walgreens-boots-alliance-reports-fiscal-2025-third-quarter/]
[8] Walgreens reports $39B in sales, $175M loss in fiscal Q3 [https://www.fiercehealthcare.com/providers/walgreens-sales-rise-7-39b-driven-pharmacy-growth-cost-cutting-measures-take-private-deal]
[9] Walgreens plans to close 1,200 stores over three years [https://www.linkedin.com/posts/cnbc_walgreens-says-it-will-close-1200-stores-activity-7252080243191001088-TPzX]
[10] 2025 Report on Top Risks in the Private Equity Industry [https://www.protiviti.com/gl-en/survey/top-risks-private-equity-industry-2025]
[11] Sycamore Partners’ Walgreens Buyout: Debt Risks and Systemic Implications [https://blogs.cfainstitute.org/investor/2025/09/03/private-capital-and-systemic-risk/]
[12] Private Capital and Systemic Risk [https://blogs.cfainstitute.org/investor/2025/09/03/private-capital-and-systemic-risk/]
[13] Sycamore Partners closes Walgreens acquisition, splits retailer into 5 companies [https://www.healthcaredive.com/news/sycamore-walgreens-acquisition-closes-retailer-split/758841/]
[14] Walgreens Boots Alliance Reports Fiscal 2025 Third Quarter Results [https://investor.walgreensbootsalliance.com/news-releases/news-release-details/walgreens-boots-alliance-reports-fiscal-2025-third-quarter/]
[15] Walgreens to close 1,200 stores following large operating losses [https://www.healthcare-brew.com/stories/2024/10/16/walgreens-close-1200-stores-large-operating-losses]
[16] Private Equity Mid-Year Trends in 2025 [https://www.cbh.com/insights/reports/private-equity-mid-year-trends-in-2025/]
[17] WBA Stock Forecast 2026 - Walgreens Price Targets & [https://tickernerd.com/stock/wba-forecast/]
[18] Sycamore Partners' plan to takeover Walgreens 'incredibly risky' [https://www.healthcare-brew.com/stories/2025/04/15/sycamore-partners-takeover-walgreens-incredibly-risky]