Walgreen And Alliance Boots Create The First Global Pharmacy

Walgreen (NYSE:WAG) has bought a 45% stake in European pharmacy-led health and beauty retailer Alliance Boots in a $6.7 billion cash-and-stock deal. The alliance brings together the two largest pharmacy chains in the United States and Europe to create the first global pharmacy business with 11,000 stores in 12 countries. With over $40 billion in annual revenue, Alliance Boots is much smaller than its U.S. rival Walgreen, but it’s Europe’s biggest seller of health and well-being products and also has strong Internet sales. It competes with CVS Caremark (NYSE:CVS) and Rite Aid (NYSE:RAD) in the U.S.View our analysis for Walgreen

Walgreen Has The Option To Acquire 100% Stake By 2015

Walgreen has acquired a 45% stake in Alliance Boots, paying $4 billion in cash and 83.4 million in shares, but has the option to acquire the remaining stake by 2015. If the option to purchase the remaining 55% stake is exercised, Walgreen would pay $4.5 billion more in cash along with 143.3 million stocks (subject to a minimum $31.18 market price per Walgreen share), i.e. an additional $9.5 billion in cash and stock along with the assumption of Alliance Boots’ debt. Alliance Boots had been seeking presence in the U.S. market for quite some time. It generated $40 billion (£25 billion) in revenue and $2 billion in operating income in 2011.

What Alliance Boots Brings To The Table

Alliance Boots’ business consists of three segments: Health and Beauty Retail, Pharmaceutical Wholesale, and Contract Manufacturing. It is a major European health and beauty retailer with over 3,330 retail stores and 625 optical practices spread over 11 countries, including Canada and some Asian markets like China. Its wholesale and distribution business, Alliance Healthcare, supplies medicines, other healthcare products and related services to over 170,000 pharmacies, doctors, health centers and hospitals from over 370 distribution centers in 21 countries. It also provides distribution services to pharmaceutical manufacturers. Alliance Healthcare recently entered the fast-growing Russian and Chinese markets.

The company also owns Almus, an umbrella brand for a wide range of low-cost generic medicines. BCM Limited is the manufacturing subsidiary of Alliance Boots and manufactures a range of own-brand and third-party medicines and popular skincare and cosmetic products such as No 7, Kangol, Toni & Guy, FCUK, Soltan and Botanics. It also generates significant sales online.

What Does The Deal Offer

The Walgreen and Alliance Boots deal creates the first global pharmacy business with 11,000 stores in 12 countries. The two together will also be the world’s largest buyer of prescription drugs and health products which will give them the leverage to negotiate better prices. The deal also provides Walgreen and Alliance Boots a large platform for further international expansion using Alliance’s Boots experience in expanding into new markets, along with an opportunity to turn Alliance Boots into a global wholesaler. The deal is expected to provide cost and revenue benefits of $100 million to $150 million in the first year and $1 billion by the end of 2016 for both the companies.

It will increase Walgreen’s first-year earnings by 23 to 27 cents per share and would compensate for the earnings loss due to the contract termination with Express Scripts this year. The deal still needs to be approved by the industry regulators.

We are in the process of revising our $35 Trefis price estimate of Walgreen stock.

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