Amid a rising tide of criticism, Walgreen Co. today gathered investors and analysts in a meeting with its top executives and those of Alliance Boots to explain the rationale behind the companies' planned union.

Walgreens, Alliance Boots, Greg Wasson, Wade Miquelon, Stefano Pessina, George Fairweather, merger, pharmacy, health care, beauty care, drug chain, retail pharmacy, prescription drugs, health and wellness, Express Scripts, William Blair & Co., Mark Miller, Lisa Gill, J.P. Morgan, Russell Redman

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Walgreens, Boots execs shed light on deal

June 22nd, 2012

DEERFIELD, Ill. – Amid a rising tide of criticism, Walgreen Co. today gathered investors and analysts in a meeting with its top executives and those of Alliance Boots to explain the rationale behind the companies' planned union.

In a Q&A-style, webcast event on Friday, Walgreens chief executive officer Greg Wasson and chief financial officer Wade Miquelon and Alliance Boots executive chairman Stefano Pessina and group finance director George Fairweather said their two-step merger deal represents a huge opportunity to create a global, pharmacy-led health care powerhouse and an iconic brand.

Together, the two retail pharmacy and health/beauty aids players can bring to the table unmatched retail, distribution, procurement, logistics, and product development and marketing capabilities that can drive growth internationally for years to come, they noted.

"This deal represent a once-in-a-lifetime brand and asset opportunity," Wasson said of the agreement with Alliance Boots, announced Tuesday. "I believe what our shareholders want us to do is position ourselves for the next 10 to 20 years, and this is the brand and asset to do it with."

Wasson said that the vision behind the agreement has its roots going back since before he became Walgreens' CEO and that activity toward a deal originated about 18 months ago.

"We saw this as an opportunity to strengthen our core business and grow outside the U.S. and in emerging markets," he said.

Pessina called the planned combination of Walgreens and Boots "a transformational deal" and noted that it gives Walgreens a platform for global expansion and Boots a vehicle to implant itself in the huge U.S. market.

"It's a long-term investment. It's an investment in the vision that we have. We can create a company that's really the first global company [in the pharmacy-led health care market]," he explained. "What convinced me to make this investment was, first, the chemistry. Apart from that, we understood that [Walgreens] has a clear strategy and is pursuing it in a consistent way. And in the long term, it is the right strategy. I am sure this strategy will drive the share price up, and up substantially." 

Under the proposed deal, Walgreens plans to buy a 45% equity interest in Boots for $6.7 billion in cash and stock, with the option to buy the other 55% of the company in about three years for $9.5 billion in cash and stock. Pending approvals, Walgreens' initial investment is expected to be completed by Sept. 1.

Walgreens and Boots note that they represent the largest retail pharmacy, health and daily living destinations in the United States and Europe and, combined, would be the world's biggest purchaser of prescription drugs and a host of other health-related products. Walgreens estimated the overall synergies across both companies to be $100 million to $150 million in the first year and $1 billion by the end of 2016.

Despite such potential, Walgreens has seen a largely negative reaction to the deal in the U.S. financial market. Its stock opened at $30.79 on Tuesday, the day the agreement was announced, but as of early afternoon trading on Friday it was down to $29.90.

Many analysts and investors have called the deal ill-timed. They point out that Walgreens continues to take a sizable hit in sales, earnings and pharmacy market share from its contract impasse with pharmacy benefit manager Express Scripts. What's more, they argue, Walgreens is paying a high price for Boots and would be entangling itself in the European market at a time when the continent's financial and credit environment is volatile.

"In the near term, it is difficult to independently evaluate the merits of this undertaking against the backdrop of major structural changes in the U.S. pharmacy industry. In our view, the timing of the acquisition is less than ideal, the execution risk is likely elevated across the enterprise, and financial flexibility is reduced at a time when share repurchase was more EPS accretive than ever before," William Blair & Co. analyst Mark Miller wrote in a research note released Wednesday. "The deal also comes amid a period of great uncertainty with regard to Europe's economic health, and the company will need to show investors that being a global pharmacy operator provides justifiable benefits, both in scale and otherwise."

Credit rating agencies Moody's Investors Service and Standard & Poor's this week said they were putting Walgreens on review for a possible downgrade, considering that the drug chain would take on a hefty debt load under the Boots deal.

"While this represents a transformative deal for Walgreens, we remain cautious, noting that this is the largest transaction Walgreens has ever done by a wide margin," J.P. Morgan analyst Lisa Gill stated Tuesday in an analysis of the deal.

"While there is limited integration risk in the near term, we are somewhat concerned that this could lead to a loss of focus on the current issues in the U.S.," Gill wrote. "In addition, while the companies pointed to procurement as one of the biggest opportunities, we are somewhat cautious on the opportunity, as we have historically seen limited opportunity for Rx procurement synergies across countries. Finally, we also point to continued uncertainty around the impact of the ongoing Express Scripts dispute, as well as the Medco piece, on the company's base business."

During the investor meeting on Friday, Walgreens and Boots executives stressed that the merger deal reflects well-thought-out financial and integration strategies and a firm grasp of the vision that will elevate the combined entity to a worldwide market leader.

"This is a phenomenal deal for our shareholders and offers a long-term competitive advantage," Miquelon said, noting that the combined Walgreens/Boots would be the partner of choice in just about any market or product segment worldwide.

According to the companies, the deal offers potentially lucrative synergies in the areas of procurement, including brand-name and generic prescription drugs, private brands and branded consumer goods; revenue generation, such as in beauty care, own brands, and health and wellness solutions; and best practices, including pharmacy, e-commerce, loyalty programs and store formats.

"Opportunities like this don't come along very often," Miquelon said. "I think we're setting ourselves up in a way that would be hard to replicate."

Fairweather emphasized Boots' history of international expansion as one of the pillars of the deal and as a key enabler as the combined company works to branch out globally. "We've done this before, but on a smaller scale," he said. "We have a track record of doing this."

When one questioner asked whether Walgreens and Boots would have been better off just establishing a partnership, Fairweather responded that such an approach wouldn't create synergies of the scale that a combined entity would, especially over the long term.

"When you bring things together, you find opportunities that you didn't think of," he said.

Alliance Boots, with total sales of about $35.7 billion, has pharmacy-led health and beauty retail businesses in 11 countries and operates over 3,330 health and beauty retail stores, most with pharmacies. The company's pharmaceutical wholesale businesses supply medicines, other health care products and related services to more than 170,000 pharmacies, doctors, health centers and hospitals from over 370 distribution centers in 21 countries.