Walgreen's VillageMD bags Summit Health in $9B deal

Walgreens-owned primary care company VillageMD is buying Summit Health-CityMD from Warburg Pincus at an $8.9 billion valuation.

Why it matters: As retail incumbents race to participate in the evolution of care delivery, VillageMD is taking a big leap forward as the deal supports the notion that after primary care, specialty care is the next frontier of value-based care.

Who advised: Warburg and Summit received financial advice from Goldman Sachs, Barclays, Jefferies, Credit Suisse and Guggenheim Partners; VillageMD turned to JPMorgan, sources say.

• Cigna, joining as a new investor, worked with Citibank.

What they're saying: "It's very hard to manage quality and cost of care without integrated specialty care services," Warburg Pincus managing director and head of healthcare TJ Carella tells Axios.

• "What they saw in Summit was not only a geographically dense primary and urgent care footprint in the largest U.S. healthcare market, but also highly differentiated specialist talent necessary to help close the loop in managing total cost of care," Carella says.
• “If you want to continue to be successful in delivering care in a value-based care model, you have to be successful managing the specialty spend and the other ancillary spend, like lab and imaging," VillageMD CEO Tim Barry tells Axios.

Between the lines: VillageMD scores a large entry point into the New York metro area's enormous health care market via Summit.

• Plus, VillageMD can now take the integrated multi-specialty care delivery model Summit has proved out in one market, and replicate this strategy nationally.
• "We think this model will scale to hundreds of other markets, and we want to make sure wherever we are, we're doing it right and doing it well," Barry says.

💭 Our thought bubble: With fresh funds injected behind VillageMD — and with Cigna joining the investor base to bring additional financial firepower — we expect more M&A to follow.

• One logical takeout candidate is Duly Health and Care (fka DuPage Medical Group), which has been held by Ares Management since 2017.
• Asked whether VillageMD has taken a look at Duly, Barry demurred: "I think it's fair to say all these organizations are generally talking to each other."

The other side: This is a huge win for Warburg and the physicians heavily invested into Summit Health-CityMD the last five-plus years.

• Summit Health-CityMD has grown to roughly $3 billion of revenue today, a source tells Axios, up from a couple hundred million of top line when Warburg acquired a majority stake in CityMD.

Catch up quick: Warburg took a majority stake in CityMD in April 2017 at roughly a $600 million valuation, subsequently buying Spano Barber Jesse & Co’s Stat Health Management in a deal valued just south of $100 million, Sarah wrote then.

• In 2019, Warburg married N.Y. metro area’s dominant urgent care chain with New Jersey's Summit Health in the first such deal of its kind.

Behind the scenes: UnitedHealth Group's Optum was said to have approached Summit earlier this year, but for a variety of reasons that didn't come together, sources say.

• VillageMD subsequently approached Summit in late summer, they say.
• Barry tells Axios the deal was made on direct approach with no auction process.

Details: WBA will invest $3.5 billion through an even mix of debt and equity, and it will remain the largest shareholder in VillageMD with a controlling stake of about 53%.

• Alongside Cigna joining as an investor, Summit Health doctors retain meaningful minority ownership, and Warburg maintains a small stake.
• The combination will have more than 680 provider locations in 26 markets.

Editor's note: After publication, Axios learned that Citi advised on this transaction, and the story has been updated to include that information.

Claire Rychlewski contributed reporting.