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Walgreen’s Swiss switch idea tied to tax savings, but some see clouds with inversion

Stefano Pessinis executive chairman Alliance Boots largest single shareholder Deerfield-based Walgreen Co.

Stefano Pessina is executive chairman of Alliance Boots and the largest single shareholder of Deerfield-based Walgreen Co.

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Updated: July 12, 2014 5:51PM



Venerable drugstore giant Walgreen Co., the 113-year-old Chicago institution known for a stock and dividend as rock-solid as a utility company’s, finds itself caught up in a drama with a risk-taking European partner that may see it become a foreign company.

If Walgreen, established on Chicago’s South Side in 1901 by Charles Walgreen Sr., leaves Deerfield, it would mark another major blow to the Chicago-area corporate roster. Aon Corp. relocated its corporate headquarters to London two years ago.

The reason Walgreen might join a growing number of companies abandoning the United States? Lower taxes — to the tune of an estimated $780 million.

But moving to a country with a lower tax rate isn’t a slam dunk for a firm that popularized the lunch-counter soda fountain, introduced malted milk as a fountain drink and was led by a Walgreen descendant until 1998.

Is Walgreen Co.’s board of directors wisely adhering to its fiduciary responsibility of rewarding shareholders, or are the directors and CEO Greg Wasson being outmaneuvered by Walgreen’s largest individual stockholder, Stefano Pessina? Pessina is a charismatic, risk-taking tycoon — one of the richest men in the world who lives in the tax haven of Monaco — said to have engineered the 2012 sale for $6.7 billion of nearly half of European pharmacy giant Alliance Boots GmbH to Walgreen.

Pessina has a history of merging small drug wholesalers, resulting in what’s now known as British pharmacy wholesale giant Alliance Boots. Pessina took Alliance Boots private in 2007 in a $22 billion deal that resulted in one of the largest leveraged buyouts in history. He moved Alliance Boots headquarters to Zug, Switzerland, in 2008 from Nottingham, England. The company maintains “operational offices” in Nottingham, a Walgreen spokesman said.

Tax perspective

Analysts argue Walgreen could be hurt or helped by a move, even as more companies flee what they see as a high corporate tax rate in the U.S. and little hope of change anytime soon.

A CNNMoney analysis released Monday showed 47 firms have relocated overseas to take advantage of lower tax rates in the past 10 years, compared with 29 in the previous 20 years.

Companies can’t just hang a shingle on a new building overseas in what is called an inversion; a U.S. firm first has to merge with one based in the lower-tax country. Then, it must do at least a quarter of its business in that country or give the foreign firm’s owners at least one-fifth ownership.

The unique aspect of Walgreen’s situation is that such a merger could make Walgreen the subsidiary of Alliance Boots — meaning that Alliance Boots, in effect, would take over Walgreen.

Michael Pryce-Jones, senior governance analyst with CtW Investment Group, a Washington, D.C.-based overseer of labor union pension funds, said the two sides may be working together to cover up their less-than-stellar performances post-merger.

“The most critical issue for long-term investors is whether talk of a tax inversion is an 11th-hour effort to justify a merger that is not generating the bottom-line benefits promised,” Pryce-Jones said. “It is worth noting here that the [merged] company recently withdrew its 2016 earnings guidance.”

Chicago’s William Blair equity research firm issued a note to investors July 8, noting that Walgreen has “missed analysts’ quarterly projections five of the past six quarters, including for the fiscal third quarter (in May).

Even if Walgreen isn’t trying to cover operational shortcomings, Pryce-Jones worries that Walgreen’s board of directors:

† May not be assessing all of the risks of an inversion

† May end up ousted from a company that will be loaded up with debt

† May lack the skills necessary to ensure that Walgreen shareholders get paid appropriately if their company ends up heavily leveraged.

An inversion would require the original Walgreen-Alliance Boots deal to be changed substantially — indeed, to be reversed so that Alliance Boots would become the parent and strip the Walgreen business of its U.S. profits, Pryce-Jones said.

“Walgreen Co. has claimed a lot of benefits could be accrued without doing a full acquisition. They talk about procurement synergies,” he said. “But the deal would have to be changed to an acquisition to take advantage of a tax inversion. And when you take over a full company, almost every company misjudges the integrational challenges.”

Hinsdale native Craig Bouchard, author of New York Times best-seller “The Caterpillar Way: Lessons in Leadership, Growth and Shareholder Value,” and CEO of Signature Group Holdings said “baloney” to most of the worries.

No, tax inversions aren’t simple and shareholders rarely approve debt issues, he said, but the real question is whether a tax inversion will raise the company’s share price.

“The only question is, ‘Will this increase the stock price?’ ” said Bouchard, who led a hostile proxy battle to become chairman and CEO of Signature Group, which is based in Sherman Oaks, California.

Bouchard said the job of a public company CEO is to raise the stock price.

“You have only one audience: investors. Your job is to raise the stock price so you give the best possible return to the people who’ve spent the money to buy the shares. … It’s not about the employees, the customers — it’s about managing the enterprise to benefit the people who own it.”

If that’s the result of a Walgreen tax inversion, that’s a successful outcome, Bouchard said.

Other analysts applaud Walgreen for considering the inversion.

In a July 2 report titled “Healthy Management at Walgreens,” Detroit-based stock analysis firm RB Equity advised investors to stick with Walgreen, based mainly “on the job management is doing.”

The stock hit an all-time high of $76.39 on June 19.

Walgreen spokesman Michael Polzin said in a statement that “we continue to evaluate a variety of issues related to acquiring the other 55 percent of Alliance Boots as part of our strategic partnership with them.”

“These include the potential timing and structure of the transaction, the combined management team, continued synergy and cost-reduction initiatives, and potential changes to our capital structure,” Polzin’s statement said. “We will do what is in the best long-term interests of our customers, employees and shareholders. We expect to announce details around these issues in late July or early August.”

He said the change in fiscal year 2016 goals resulted from “the many ‘step two’ considerations and current business performance.”

“Specifically, once key decisions have been made on the above matters, Walgreens anticipates being in a position to hold an investor call, which is expected to occur by late July or early August,” Polzin said in the statement.

Bouchard said the most valuable discussion is one not being had — namely, what can be done as a country to encourage more high-quality companies like Walgreen to invest in the U.S.?

“The last I heard, we have a slight ‘jobs’ problem, with a record number of people having exited the labor force and given up looking for employment,” he said. “We also have an all-time record number of people on food stamps. When our biggest and best companies pursue strategies like inversion, we should address the root cause, while attracting their foreign counterparts to come and invest here.”

Email: sguy@suntimes.com

Twitter: @sandraguy



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