Ailing retailers like Walgreens Boots Alliance have scared off even the most daring Wall Street financiers. But that fear has repeatedly proven an opportunity for Sycamore Partners’ Stefan Kaluzny.

The intensely secretive co-founder of the private equity firm has been able to make big bets that Americans are not done with malls and in-person shopping, with few rivals daring to circle.

This week Sycamore, which has sucked up waning brands such as Staples, Talbots and Ann Taylor despite managing only about $10bn, announced its biggest deal yet: a $23.7bn transaction to take Walgreens private.

The buyout firm now has to revive a business ravaged by declining prescription drug reimbursements and ecommerce, with 12,500 outlets spanning the US, Europe and Latin America, under brands including Walgreens, Boots, Duane Reade and Benavides. Many peers see the stores as unsalvageable.

“It’s not for the faint of heart,” one lawyer who has worked with Sycamore said of leveraged buyouts in the retail sector. “Oftentimes these deals have less competition because [they’re] going where other people won’t touch with a 10-foot pole.”

Kaluzny’s well-worn playbook starts with the intricate dossiers Sycamore maintains on hundreds of US retail chains, one Wall Street veteran recalled.

The next step is achieving a modest purchase price. Sycamore has developed a reputation for bargaining hard right up until signing. In some cases — the $6.9bn deal for office supplies chain Staples, for example — Sycamore has even pulled off price chips after reaching a handshake on the terms, according to securities filings and deal insiders.

After landing a deal, Sycamore makes aggressive plans to get its equity investment back quickly by breaking up a target or selling off real estate to generate immediate cash proceeds.

With Staples, Kaluzny rapidly separated the consumer chain that had been battered by Amazon from the business-to-business segment, and sold the company’s headquarters to itself so that it could then collect lease payments. The result: a $1bn dividend within a few years.

“Sycamore is willing . . . to get their hands dirty,” one person involved in the Walgreens buyout said.

The firm’s success had less to do with “brilliant operational moves” than the fact they were “not sentimental” and were willing to shut down or liquidate business lines quickly, the person said. “They’re willing to play hardball.”

Sycamore and Kaluzny declined to comment.

Such high-stakes gambits are typical of an investor seen by peers as a brutally tough negotiator with a stomach for some of the most complex turnarounds on Wall Street.

Kaluzny honed his craft at buyout group Golden Gate Capital, before setting up Sycamore in 2011. It was a rich time to buy brick-and-mortar retailers: shopping centres were still full of foot traffic and the 2008 financial crisis had knocked many of their businesses off track, creating cheap opportunities for pugnacious investors such as Apollo Global Management and KKR.

Yet since then, the approach has sometimes struggled.

Investing in retail companies with hulking real estate footprints and thousands of employees can be treacherous, and when retailers fail, they do not collapse quietly.

“Private equity firms have lost so much money in retail,” said one banker that has worked with Sycamore. “Retail and leverage don’t usually work well. If you get the timing wrong, if you get the fashion wrong, you get your head handed to you.”

One of Sycamore’s thornier situations was its 2014 investment in retail conglomerate Jones Group, where the buyout firm sold two of the company’s most valuable brands — Stuart Weitzman and Kurt Geiger — to another entity it controlled.

It renamed the rump of the business Nine West, which filed for bankruptcy in 2018, and sparked a legal brawl.

Creditors accused the private equity group of stripping Nine West of valuable assets, leaving it unable to pay off its debt and ultimately insolvent. Sycamore settled the dispute in court by paying junior bondholders; in exchange, the group received releases from future liabilities related to the buyout.

Three years after Nine West’s bankruptcy filing, another Sycamore portfolio company, private department store chain Belk, filed for bankruptcy under the weight of more than $1bn in debt after six years under the firm’s ownership. Sycamore ultimately ceded control of the company to lenders in a restructuring last year.

Sycamore’s first fund had returned 24 per cent as of the third quarter of last year, while its third fund from 2018 had brought in 18 per cent, according to a person familiar with the returns and public filings. However, its second one from 2014 has only returned 5 per cent.

The private equity group launched a fourth fundraise during the second half of last year which has yet to close, according to a person familiar with the matter.

While private equity titans like Blackstone and KKR have generally walked away from retail buyouts, Sycamore — and Kaluzny — has stuck around.

Kaluzny has run the firm on his own since 2022, when his co-founder Peter Morrow departed. “Stefan’s smart about it,” said the lawyer. “They really scrutinise the assets and figure out ways they can capture value, in a way other people couldn’t.”

With Walgreens Boots, the 90 per cent drop in the company’s market capitalisation in the past decade spells opportunity.

US pharmacy chains have suffered from a punishing combination of flagging sales and steeper costs, and Walgreens has been no exception.

The buyout group will attempt to turn the business around by using the same game plan it has applied to other targets in its 14 years of buying brands, according to people familiar with the group’s business strategy.

Sycamore ultimately plans to split the pharmacy chain into at least three businesses, the Financial Times previously reported. The company’s US pharmacy retailer Walgreens, its British retail arm Boots, and the speciality pharma unit Shields Health Solutions are among the units that could ultimately become independent companies.

Pulling that off means putting in place precise financing arrangements for the deal to reflect the differing prospects of the businesses, one of the reasons the buyout took months to negotiate.

Lenders to the US retail business, for example, required Sycamore to secure the debt with inventory, including prescription drugs, according to a person involved in the deal.

Such a structure gives lenders — which include private credit firm Ares — a claim on the assets if the unit defaults on its debt or ultimately files for bankruptcy.

Cleaving a company into parts can help buyout firms unlock conglomerate discounts and secure a higher overall payout, and Sycamore is well practised in the art. But there is still considerable work to be done whipping parts of Walgreens’ core business into shape for potential future buyers.

“Presumably Sycamore’s going to be focused on cost-cutting and cost-reduction to improve cash flow,” said James Goldstein, the head of US retail at CreditSights.

“I’m sure they’ll push hard, but do they have better ideas of how to fix the pharmacy business than the existing management team or anyone else? I don’t know.”

Additional reporting by Sujeet Indap, Antoine Gara and Eric Platt in New York