Generation Beta, Deloitted to meet you

🍺 Sha-not-so-boozey - While Gen Z might be dancing away on TikTok, they are probably doing it sober (or at least without alcohol). A new study has found that 62% of people aged 18 - 34 say they drink alcohol vs. the 72% that said so in the same survey in the early 2000s. While Gen Z might be getting back on the wagon, over 55 Americans (baby boomers) are falling off of it. Notice the Michelob Ultra commercial that starred Catherine O’Hara (71) and Willem Dafoe (69) beating up on the younger generation, because in the same survey, 49% of people aged 55+ in the early 2000s said they drank vs. 59% today. Baby boomers are getting after it.

❤️ Valentines Day is for lovers employers - 151,000 new jobs were added in February, which was below the forecasted amount of 170k but above January’s 125k jobs added. The unemployment rate rose from 4.0% to 4.1%, and economists think the government job cuts came too late to be captured in the February numbers. Although, February’s tally did include 10k federal government jobs lost over the month. While the Fed is unlikely to cut rates at the next meeting, a softening labor market in the coming months could change their tune. Regardless, economists are bracing for a bumpy next few months as government jobs and companies reliant on government relationships are in for a rough one.

🤝 Musk is not so Deloitted to meet you - Made it pretty far in my newsletter writing career before I dropped that one, but it just felt right. The US government spends billions on contracts with consulting firms, making it the prime target for Musk’s DOGE. Accenture already told its staff it was cutting down on the “bench” employees. While I don’t wish losing a job on anyone, in IB (where we were also advisors or a different type of consultant), we used to joke that consultants are the ones you pay to borrow your watch and tell you the time. Anyway, that’s enough consultant humor for one newsletter.

In this section, I had planned on going over the top points from the speech President Trump had given on Tuesday, but ultimately, it was full of statements that he has made in the past. While the market is pricing in tariffs, who knows if he will follow through on them or not. As I write this, he has already extended the deadline a few different times, so by the time you get this newsletter, the world might have changed completely. With that in mind, I figured giving an overview on the Walgreens LBO would be a happier topic because who doesn’t love private-equity leveraging a company to the tits and cutting costs at all, no pun intended, costs.  

What happened?

On Thursday, the private equity firm, Sycamore, announced they will purchase Walgreens for $10 billion in what is one of the largest leveraged buyouts (LBOs) of the last decade.

What is an LBO?

You may hear that private equity firms ruin the quality of companies they take over. While not always true, there unfortunately is an underlying cause as to why that happens. A leveraged buyout is when a private equity firm purchases a company with a mix of debt and cash.

The debt sits on the company’s balance sheet; rather than the PE firm’s balance sheet, and the revenue from the company pays the interest expense on the debt.

In order to make returns for their shareholders, PE firms need to cut operating costs in order to make room for the interest expense, and they need to increase top-line growth. What happens is a process called margin expansion. Ultimately, the PE firm raises cash flow and sells the company at a higher multiple they bought it for to return funds back to their shareholders.

The practice of LBOs has been called predatory because the PE firm typically takes strict cost-cutting measures, which sometimes leads to a decline in the overall quality of the goods or service.

How did Walgreens find itself here?

The downfall of Walgreens has been a long and winding road of missteps in the face of industry changes. To highlight some of the major ones:

#1 Failed to navigate the online marketplace landscape

While many retailers were shrinking their footprint to make way for the boom of ecommerce, Walgreens was slowly expanding to 8,000 stores across the US. Last year, 78% of the US population lived within a 5 mile radius of a Walgreens-owned pharmacy.

#2 Failed to navigate the change in the insurance industry

In the pharmacy industry, the powerful firms that pay for a patients’ prescriptions are called a pharmacy-benefit manager (PBM). The large retail footprint was used by Walgreens to receive favorable terms from PBM’s. However, in 2011, Express Scripts, a large PBM, called Walgreens’ bluff. Walgreens lost access to millions of patients.

Over the years, other pharmacies & insures have been purchasing PBM’s to grow vertically integrated: 2018 - Cigna bought Express Scripts for $67 billion and CVS acquired Aetna for $70 billion.

The acquisitions protected pharmacies from lower reimbursement rates from the PBM during new contract negotiations.

Walgreens failed to find a partner. It was at that moment, Walgreens knew it had messed up

#3 Failed to navigate the change in the healthcare industry

After a failed partnership with notorious Theranos in 2013, Walgreens started to enter into the healthcare space. Walgreens purchased a controlling stake in VillageMD, a network of clinics, for $5.2 billion. Then, Walgreens bought a group of urgent-care centers, including CityMD, for $9 billion in 2022. The CEO who had taken over from the previous CEO was then ousted in 2023. Yes, 3 CEOs in a decade.

To make matters worse, in January, the company said it would suspend its quarterly dividend—paid for 91 straight years—because it needs the cash to refinance debt and deal with litigation, including a recent Justice Department lawsuit over the pharmacy’s distribution of opioids.

What does Sycamore hope to do with it?

Sycamore has announced that as part of the acquisition they will begin to sell off pieces of the business to partners, and they will focus on the parts of the business still working. Regardless, cost-cutting is inevitable to pay for the debt taken out by Sycamore to purchase Walgreens.

By the numbers, how bad was it?

In 2015, Walgreens was valued at $106 billion, with the $10 billion representing a 91% decline in value. As recently as 2019, KKR, another PE firm, had made a roughly $70 billion buyout offer of Walgreens. That one has got to sting.

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• Continuing on the topic of private equity firms loading up on debt, Blackstone has raised the largest ever commercial property debt fund with an $8 billion dollar fund. In the wake of the Global Financial Crisis of 2008, banks had less appetite for real estate debt, so non-bank lenders grew in popularity. This is a big sign that the industry is still as popular as ever.
• Honestly, not even a financial story, just find it hilarious that the next generation of people, those born after January 1st of this year, will be called Generation Beta. Only thing funnier is that it is immediately following Gen Alpha. Not a psychologist, but don’t think this will help towards the fight against bullying.
• And you think returning to the couch after having forgotten to grab your Olipop from the fridge was a waste of a trip, imagine sending a spacecraft to the moon only to have it tip over in low gravity and not be able to complete its mission. Oh, did I mention, this is the second time that has happened for Intuitive Machines?

Anyone know how Zappos started? A guy went to a local mall and took pictures of shoes. He then put it up for sale on a website, and if someone purchased the shoes, the guy would go to the mall, purchase the shoes, and ship them to his customer.

While the book is not about Zappos specifically, it is about the process of startups proving out a concept before devoting time and resources to it through what is known as a Minimum Viable Product (MVP). Until you get positive feedback from the market, you shouldn't devote hundreds of hours and thousands of dollars. You should think of the easiest way to test an assumption through an MVP, and continue to iterate from there. There is a reason this book is a staple of Y Combinator.

⭐ 4.82 / 5.0 in my book (no pun intended)

1. "Oh hi Mark"
2. "Hi, I'm Paul"
3. "Hello, is it me you're looking for?"
4. "Hello from the other side"

Marvel Comics once owned the rights to the word “zombie.”

1. Disaster Artist or The Room (James Franco or Tommy Wiseau)
2. Jimmy Neutron (Paul, the monkey)
3. Hello (Lionel Richie)
4. Hello (Adele)