Walgreen
's (
WAG
) stock has slumped since it announced the Alliance Boots deal. The
stock has made back some of these losses after the management
attempted to reassure investors about the rationale behind its
decision to purchase a 45% stake in the European pharmacy-led
health and beauty retailer in a $6.7 billion cash-and-stock
deal. But the stock reached a low of $29 on Monday as investors
continued to be worried about the price, timing and necessity
of the deal in the backdrop of an uncertain European
economy. Walgreen competes with CVS Caremark (
CVS
) and Rite Aid(
RAD
) in the U.S.
View our analysis for Walgreen
Investors Skeptical About Cost, Timing and Wisdom of the
Deal
Walgreen acquired a 45% stake in Alliance Boots, paying $4
billion in cash and 83.4 million in shares and it intends to
acquire the remaining stake by 2015. The market reacted sharply to
the news, raising doubts over the cost and timing of the deal and
the risks associated with increased exposure to current European
economic uncertainties. Many investors had hoped that Walgreen
would buy its own shares back rather than go for an acquisition
such as this.
The deal might also have an adverse impact on Walgreen's credit
rating due to the increase in debt to $11
billion. The pessimism dragged the stock down to a new low
near $28-29. The stock has already lost significant value, down
from the $45-levels in June 2011, after ending its contract with
pharmacy benefit manager Express Scripts that accounted for 12% of
its business in 2011.
Walgreen Sees Long-Term Sense in the Trans-Atlantic
Alliance
The Walgreen and Alliance Boots deal creates the first
global pharmacy business with 11,000 stores in 12 countries.
It provides Walgreen and Alliance Boots a large platform for
further international expansion based on Alliance's experience in
expanding into new markets such as China and Latin America, along
with the opportunity to turn Alliance Boots into a global
wholesaler. Over time, it is likely to enter new markets by first
acquiring wholesalers and subsequently expanding retail
presence.
While investors see the deal as a big risk at a time when the
European governments are ridden with debt worries, Walgreen
sees Alliance Boots as a long-term bet by creating a global brand.
It expects the timing of the deal to give them the advantage to
stay ahead of the industry that is gradually heading toward
consolidation and globalization. Walgreen expects the deal to
provide cost and revenue benefits of $100 million to $150 million
in the first year and $1 billion by the end of 2016 for both the
companies. The two together will also be the world's largest
buyer of prescription drugs and health products which will give
them leverage to negotiate better prices for generic drugs and
other non-pharmacy products.
Alliance Boots is the largest European pharmacy-led drug
retailer and health and well being products seller that generated
$40 billion (£25 billion) in revenue and $2 billion in operating
income in 2011, and we believe the market may be discounting the
combined entity's lone-term earnings and growth potential over
short-term uncertainties. Nonetheless, integrating a company of the
size of Alliance Boots is unprecedented and a challenging task for
Walgreen.
We are in the process of revising our $35 Trefis price
estimate of Walgreen stock.
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