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DEERFIELD, Ill. — With its $6.7 billion deal to acquire a large stake in Alliance Boots, Walgreen Co. has become the first American drug chain to delve into overseas markets and set in motion what could be dramatic changes for its entire operation.
At the same time, the agreement — which will give Walgreens a 45% equity interest in the European pharmacy retailer and an option to buy the rest of the company later on — helps position Alliance Boots in the United States.
The union of Walgreens and Boots will create one of the world’s largest drug store and pharmacy retailers, with more than 11,000 outlets in 12 countries, as well as a wholesale pharmaceutical business with operations in 21 nations.
“We are bringing together the strengths and expertise of each company to create a worldwide health care platform for the future that can provide innovative ways to address global health and wellness challenges,” Walgreens president and chief executive officer Greg Wasson said about the mid-June deal with Boots.
“We are looking forward to working with Alliance Boots to leverage our combined strengths and provide an even broader range of innovative, cost-effective products and services to patients and customers across the health care landscape,” he says. “Together we will be ideally positioned to expand our customer offerings in our existing markets and become the health and well-being partner of choice in emerging markets.”
While last month’s transaction gave Walgreens slightly less than half of a controlling interest in Boots, it could take full control of the company by 2015.
Under the terms of the deal, Walgreens has the option to acquire the remaining 55% of Alliance Boots for $9.5 billion in cash and stock.
If Walgreens opts not to take full control of Boots, its stake will be reduced to 42%.
Walgreens expects to complete its initial investment in Boots by September 1.
For their part, Boots executives say that teaming up with Walgreens will help the company that already has a strong presence across Europe, Asia and a portion of North Africa with more than 3,300 stores and several high-profile branded products get a firm foothold in the United States.
“This strategic transaction represents a further vital step in achieving our vision of becoming a global health care leader. We believe that it will bring clear benefits to all stakeholders, creating significant and sustainable industrial value through synergies and the deployment of our joint expertise," Alliance Boots executive chairman Stefano Pessina stated. "The fit is natural; Walgreens’ consumer profile in the U.S. is similar to Boots in the U.K. in many ways: a trusted and much-loved pharmacy brand with a strong heritage. Our pharmaceutical wholesale businesses will provide their logistics know-how to Walgreens and are well placed to be one of the growth engines of the new enterprise."
Pessina called the deal with Walgreens “testimony to the great track record and accomplishments of the Alliance Healthcare and Boots teams that have delivered strong growth since the creation of Alliance Boots six years ago and its subsequent privatization."
He added, “I strongly believe that this transaction offers further significant growth opportunities and marks a very positive milestone for the health care industry as a whole.”
In striking a deal with Walgreens Pessina continues his ongoing effort to make Boots into a global retailer.
Since taking the reins at the company in 2006 after securing a $12 billion merger between Boots and his company, Alliance Unichem, the Italian billionaire has expanded Boots through a series of international acquisitions.
In 2007 he joined forces with the private equity firm Kohlberg Kravis Roberts to acquire Alliance Boots for $22 billion in Europe’s largest leveraged buyout ever.
More recently Pessina has pursued an acquisition or merger, either in Asia or in North America, to continue Boots’ international expansion.
“If we want to be a global company, we need a presence in the U.S.,” he says.
While Walgreens’ stake in Boots is seen as a positive long-term move by executives at both companies, some investors and analysts have been hesitant to endorse the deal.
Walgreens’ stock tumbled by 5.9% on the day the deal was announced and fell another 4.2% the following day. The company’s share price has inched up a bit since then but remains well below the $31.96 at which it was trading the day before the deal was announced.
“We believe that the acquisition of the 45% stake in Alliance Boots could prove to be a distraction to management as the company works to improve its U.S. business,” Citi Investment Research analyst Deborah Weinswig wrote in a note to investors the day after the deal was announced.
She said her pessimism was based mostly on the fact that Walgreens is untested on making an acquisition of the magnitude of the Boots deal work.
“U.S. drug retailers have not historically acquired international companies, and Walgreens’ integration experience — especially on this scale — is limited,” Weinswig said.
