Walgreens' Transition: From Pharmacy Giant to Private Equity Acquisition and Its Tax Implications

A Storied History

Walgreens was founded in 1901 by Charles R. Walgreen Sr. in Chicago, Illinois. The company quickly grew from a single drugstore to a nationwide pharmacy chain, expanding aggressively over the decades. By 2014, Walgreens merged with Alliance Boots, forming Walgreens Boots Alliance (WBA), an international retail pharmacy powerhouse.

Rise and Challenges

Despite its early dominance, Walgreens faced intense competition from CVS, Amazon’s entry into pharmacy services, and declining retail foot traffic. Several failed acquisitions and regulatory challenges further eroded its market position. In 2023, Walgreens cut dividends in half, lost its Dow Jones index spot to Amazon, and struggled with declining revenue and profitability.

Acquisition by Sycamore Partners

To address its financial struggles, Walgreens Boots Alliance agreed to a private equity buyout by Sycamore Partners for $10 billion. The deal, valued at $24 billion, including debt, marks the first time Walgreens will be privately held since the 1920s. The acquisition is expected to close by Q4 2025.

Potential Tax Implications of the Walgreens Buyout

1. Debt Financing and Interest Deductibility (IRC §163(j))

Private equity (PE) acquisitions typically use leveraged buyouts (LBOs), where the firm finances part of the purchase with significant debt. Under IRC §163(j), businesses can deduct interest expenses on their debt, but there is a limitation:

• The deduction is capped at 30% of adjusted taxable income (ATI).

• Any excess interest expense is carried forward indefinitely.

Example:If Walgreens' post-buyout adjusted taxable income (ATI) is $3 billion, and interest expenses from the leveraged buyout total $1.2 billion, the deductible portion is limited to:

• 30% of $3 billion = $900 million deductible.

• $300 million must be carried forward to future years.

  
  

2. Step-Up in Basis for Depreciation (IRC §168 & §197)

When private equity firms acquire companies, they often revalue assets at their fair market value (FMV), leading to a step-up in basis. This results in higher depreciation and amortization deductions under IRC §168 (accelerated depreciation) and §197 (intangible assets amortization).

Example:If Walgreens’ intangible assets (e.g., brand, goodwill, trademarks) were recorded at $5 billion pre-buyout but reassessed to $8 billion post-buyout, the additional $3 billion can be amortized over 15 years, reducing taxable income annually by $200 million ($3B ÷ 15 years).

3. Tax Treatment of Carried Interest (IRC §1061)

Private equity firms typically earn a share of profits as carried interest, which is taxed at preferential long-term capital gains rates rather than ordinary income tax rates. Under IRC §1061, carried interest qualifies for long-term capital gains treatment only if held for at least three years.

If Sycamore Partners later sells Walgreens at a profit:

• Gains held over three years will be taxed at 20% (capital gains rate).

• Gains held under three years could be taxed at ordinary income rates (up to 37%).

  
  

4. NOL Utilization and Limitation (IRC §382 & §172)

If Walgreens has accumulated Net Operating Losses (NOLs) from previous years, private equity firms may attempt to use these losses to offset future taxable income. However, under IRC §382, if there is a more than 50% ownership change, NOL utilization is restricted.

Example:If Walgreens has $2 billion in NOLs, but Sycamore’s ownership triggers §382 limitations, the annual usage of NOLs might be restricted to a fraction of the company’s FMV.

5. State and Local Tax Implications

Given Walgreens' nationwide presence, state tax laws will also play a significant role:

• Some states do not conform to federal rules on interest deduction limitations.

• Certain states restrict NOL carryforwards or have their own depreciation rules.

Post-buyout, Walgreens may relocate or restructure subsidiaries to benefit from low-tax jurisdictions (e.g., moving intellectual property holdings to Delaware or offshore).

Final Thoughts

Walgreens’ acquisition by Sycamore Partners marks a major shift in the company’s long history. The tax implications will influence how the deal is structured, how much debt is used, and how future profits are taxed. With interest deductibility, asset revaluation, carried interest taxation, and NOL restrictions, this acquisition highlights the complex tax strategies involved in private equity deals.

As tax policies evolve, potential changes to corporate tax rates, interest deductibility, and carried interest rules could significantly impact the deal’s financial outcomes. Businesses should closely monitor any new legislative developments that may alter the tax landscape for leveraged buyouts and private equity acquisitions.