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Walgreens Pays £4bn For Alliance Boots Stake « Back
Selina Harrison, August 2012
Walgreens, the US’s biggest drugstore by sales, announced in June that it had agreed to buy a 45 percent stake in European health and beauty group Alliance Boots (Boots). Walgreens will pay £4bn ($6.7bn) in cash and stock for the stake, but the two stage deal could mean that Walgreens swallows the whole of Boots for £10bn in three years’ time. For now, though, the deal will create the world’s biggest buyer of prescription drugs and give both companies reach into new markets.

Boots is one of the most recognisable names on the UK High Street. With 3330 stores across the region, the firm calls itself the UK’s most popular chemist. As well as selling prescription drugs and other medications, it sells a host of health and beauty products, offers a photography service and even sells food.  Boots’ tie up with Walgreens will create one of the world’s largest drugstore and pharmacy retailers. With a total workforce of 360,000, the combined company’s network of more than 370 distribution centres will serve more than 170,000 pharmacies, doctors, clinics and hospitals in 21 countries.

“This is a chance to create the world’s first truly global pharmacy and health care enterprise,” said Gregory Wasson, chief executive of Walgreens, in an interview with the New York Times. “There’s nothing else out there that can match it.”

Under the terms of the deal, which had been in negotiation for 18 months, Walgreens will initially acquire 45 percent of Boots’ equity for $6.7bn, comprising $4bn in cash and 83.4 million shares. Walgreens then has the option to buy the remaining 55 percent of the equity in Boots three years after the deal closes. If Walgreens decides to exercise this option, it will pay $4.9bn in cash and issue 144.3 million shares for the remaining equity. Based on the current share price of Walgreens, the second step of the transaction is valued at $9.5bn (£6bn). If this deal goes ahead, Walgreens will also then assume Boots’ outstanding debt, which currently stands at just over £7bn ($11bn). However, Boots is expected to cut net borrowings to between £5.5bn and £6bn by the time Walgreens exercises the option to acquire the majority stake.

For Stefano Pessina, executive chairman of Boots, the deal satisfied his long-sought desire for the company to gain a foothold in the US. “If we want to be a global company, we need a presence in the US,” said Mr Pessina in an interview discussing the deal. He also said that the deal will pave the way for further acquisitions, in China and Latin America. Alluding to Walgreens’ strong cash flow, he said: “We will have so much money that we’ll have to buy something and expand rapidly.”

These plans take Boots further away from its roots in Nottingham, England where it was established by Jesse Boot in 1849. In recent years Mr Pessina has worked hard to turn Boots into a global retailer. In 2006 he helped secure a $12bn merger between Boots and its rival, Alliance Unichem, a major player in the European pharmacy sector. A year later he joined forces with private equity firm Kohlberg Kravis Roberts (KKR) to acquire Alliance Boots for £12.2bn. Mr Pessina made £500m when he took the company private. The deal – the first private equity purchase of a FTSE 100 company – was funded with an alarming £9bn of debt and many predicted it would end in disaster. Fortunately, unlike many private equity deals in the boom-era, this deal is considered quite a success.

Trading profits at Boots have grown at double-digit rates each year since 2007. During this time £2.1bn has also been ploughed into the company to make store improvements and update IT systems, while £800m has been spent on acquisitions such as that of German wholesaler Anzag. Boots has also managed cut its net debt by £2bn during this time.

Along with success, Boots has also courted controversy. In 2010, rows broke out when Boots moved its headquarters from Nottingham to Zug, Switzerland, bringing scrutiny of its tax affairs. Over the years, restructuring of the company has resulted in hundreds of job losses. Meanwhile, although Boots has ploughed about £182m into its UK pension fund, this year the largesse was blunted by Boots’ decision to close its final salary pension scheme to future accruals. Further, the company has come under fire from the PDA, the pharmacists’ union, which has helped staff win tribunal claims after the company sought to cut pay for Sunday working from double-time to time-and-a-half.

The controversy did little to deter investor interest in Boots. Indeed, Mr Pessina has divulged to some media sources that there was a queue of potential investors waiting in the wings for Boots. The deal with Walgreens means that Mr Pessina and KKR will make about 2.7 times return on their £3.9bn equity stake in Boots. KKR, which had invested $1.8bn in Boots, will receive $1.8bn in cash and around $200m in Walgreens stock. Meanwhile, Mr Pessina will reinvest his proceeds from the deal to gain an 8 percent stake in Walgreens.

The deal comes at a time when Walgreens faces weakness in its home market. Indeed, following a dispute with Express Scripts, which manages prescription drug benefits for employers and other clients, in January Walgreens ended its partnership with the pharmacy benefit manager and its retail business has suffered as a result.

In the quarter ended 31 May, Walgreens revealed that total sales slipped 6.6 percent. With former customers going to rivals CVS Caremark Corp and Rite Aid Corp to pick up their prescriptions instead, the reduction in business also hurt sales of general merchandise. On 19 June, the day the deal was announced, Walgreens reported third-quarter earnings of $537m, or 62 cents per share, compared with $603m, or 65 cents per share, a year earlier. Meanwhile, with investor confidence in Walgreens still low due to its Express Scripts dispute, on 19 June Walgreens shares fell 5.7 percent to $30.15 in afternoon trading on the New York Stock Exchange.

There was further bad news. Standard & Poor’s warned that the amount of Boots debt that Walgreens will take on as part of the deal “will result in a meaningful deterioration of Walgreen’s financial risk profile”.
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