Walgreen goes global with Boots stake; stock sinks
BY SANDRA GUY Business Reporter/sguy@suntimes.com June 19, 2012 6:16AM
FILE - In an Oct. 5, 2005 file photo people walk by a Boots pharmacy in central London. Drugstore chain Walgreen Co. says it will spend $6.7 billion to buy a stake in health and beauty retailer Alliance Boots. (AP Photo/Sergio Dionisio)
Updated: July 21, 2012 6:13AM
Walgreen Co. leapt into international competition and will become the world’s largest buyer of prescription drugs with its announcement Tuesday that it is paying $6.7 billion in cash and stock to buy a 45 percent stake in European pharmacy giant Alliance Boots.
The deal, Walgreen’s biggest ever, is expected to close Sept. 1 and will create the world’s largest drugstore chain with more than 11,000 stores in 12 countries and 370 distribution centers to hospitals, doctors and drugstores. Walgreen intends to take over all of Alliance Boots three years after the deal closes, said Walgreen CEO Greg Wasson in a news conference that caught analysts and investors by surprise. Experts say the deal would allow Walgreen to expand into China and other emerging and fast-growing markets. Walgreen said it expects annual costs savings across both companies of up to $150 million in the first year after the deal closes and $1 billion by the end of 2016. Walgreen’s stock fell 5.8 percent, to end the day at $30.09 a share, as investors and analysts questioned how wise it is for Walgreen to jump into new markets, new businesses and the financially ailing European market when Walgreen is struggling with so many other issues. The top concern centers on Walgreen’s inability to agree on a new contract with pharmacy benefits manager Express Scripts — a decision that is expected to cost Walgreen $5 billion in yearly revenue. Since the split, Walgreen has lost customers to rival CVS Caremark. Walgreen said it would rather give up the business than agree to fill prescriptions on unprofitable terms. Express Scripts’ April 2 takeover of rival Medco Health Solutions threatens another big hit soon, since Medco accounted for 12.5 percent of Walgreen’s prescription market share in 2011, according to industry reports. “Investors are asking why Walgreen would diversify away from its U.S. business, where (Walgreen) is facing increased competition, slow U.S. growth and drug-reimbursement issues, to take on this new challenge and geography where they have no experience?” said Morningstar analyst Matthew Coffina. Though Alliance Boots operates Boots, the largest drugstore chain in the United Kingdom, it is primarily a pharmaceutical wholesaler — a low-margin business where Walgreen has no expertise, Coffina said. Wholesale pharmaceutical operations account for 63 percent of Alliance Boots’ revenues but only 31 percent of its operating profit.
