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Walgreen to spend $6.7 billion on stake in European drugstore chain

Published: Wednesday, June 20, 2012

Updated: Wednesday, June 20, 2012 09:06


CHICAGO - For the first time in its 111-year history, venerable drugstore chain Walgreen Co. is reaching beyond the borders of the United States with an unprecedented international expansion that will create the world's largest buyer of prescription drugs and provide the company with the tools to expand into emerging markets.

The Deerfield, Ill.-based company said Tuesday it has agreed to buy a 45 percent stake in the European pharmacy and health-and-beauty retailer Alliance Boots GmbH for $6.7 billion in a cash-and-stock transaction that will create a network of 11,000 drugstores in 12 countries.

The deal, which is by far the largest in Walgreen history, is expected to close Sept. 1. It includes an option for Walgreen to take full control of Swiss-based Alliance Boots in about three years for an additional $9.5 billion in cash and stock, plus the assumption of Alliance Boots' debt.

Walgreen Chief Executive Greg Wasson said the company has "every intention" of completing the deal, which he said will create "immediate synergies in the near term" that will allow Walgreen to achieve annual cost savings of up to $150 million in the first year after the deal closes, and as much as $1 billion by the end of 2016.

"It's game-changing," Wasson said in an interview. "It's transformational for us. We're taking two of the best, most-respected and powerful brands in the world and putting them together to create something new."

In addition to operating about 3,300 health-and-beauty stores in 11 countries, the vast majority of which contain pharmacies, Alliance Boots operates a network of 370 wholesale pharmaceutical distribution centers that dispense more than 260 million prescriptions to 170,000 pharmacies, doctors and hospitals worldwide.

It also develops health and beauty products through a research and development arm in Nottingham, England, some of which are sold in the U.S. at Target and CVS stores. Wasson said Walgreen plans to roll out Boots-branded products in its stores nationwide after the expected transaction, which could provide an immediate boost to sales.

The heft of the combined enterprise, which expects revenue of about $130 billion in 2016, will give it more leverage to negotiate better prices for generic drugs and provide more financial power to build upon Alliance Boots' expertise in expanding into emerging markets, particularly in China and Latin America, said Alliance Boots' executive chairman, the Italian billionaire Stefano Pessina.

While Walgreen highlighted immediate cost savings through economies of scale and the potential to grow revenues by cross-promoting certain products, investors reacted tepidly to the deal and a disappointing earnings report, sending Walgreen shares down 5.85 percent to close at $30.09 on the New York Stock Exchange.

Some analysts called the deal rich and questioned the logic behind the move, which will open Walgreen to exposure to Europe at a time of severe economic uncertainty and stunted growth.

"It doesn't look like a bargain by any means," said Matthew Coffina, an analyst with Morningstar Inc. "The timing is particularly interesting, considering they have some serious difficulties in the U.S., combined with economic turmoil in Europe and long-term reimbursement pressure with government cuts and austerity measures."

Walgreen executives said the deal has been in the works for about 18 months and did not come in response to its protracted spat with the pharmacy benefits manager Express Scripts Holding Co., which accounted for about 88 million of the 819 million prescriptions Walgreen filled in 2011.

Since the two companies parted ways on Jan. 1 because of a rate dispute, Walgreen sales have faltered.

For its fiscal third quarter ended May 31, Walgreen said profit dipped 11 percent to $537 million, or 62 cents a share, down from $603 million, or 65 cents, a year earlier. Sales fell 3.4 percent to $17.75 billion on an 8.4 percent drop in prescription volume.

Placing the company further at risk is Express Scripts' $29.1 billion April merger with rival Medco Health Solutions Inc. Walgreen filled 125 million scripts for Medco last year and is on pace to fill about 108 million in 2012.

While the Alliance Boots investment should offset the near-term earnings loss tied to the loss of Express Scripts, the long-term absence of a contract between the two, along with the risk of losing additional prescription volume when its pact with Medco expires, "outweighs the long-term benefit" of the deal, Mizuho Securities' Ann Hynes and John Sourbeer said in a note to investors.

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