In a bold move that could further transform the pharmacy business, Walgreen Co. has agreed to acquire a 45% equity stake in Alliance Boots, a global pharmacy and health and beauty care retailer and wholesaler based in London.

Walgreen Co., Alliance Boots, London, Walgreens, Wade Miquelon, Greg Wasson, Stefano Pessina, Kohlberg Kravis Roberts & Co., KKR, Deerfield, Ill., Nottingham, England, Thomas Sabatino, senior vice president and chief strategy officer Robert Zimmerman, Dominic Murphy

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Inside This Issue - News

Walgreens takes global stage

July 9th, 2012

NEW YORK – In a bold move that could further transform the pharmacy business, Walgreen Co. has agreed to acquire a 45% equity stake in Alliance Boots, a global pharmacy and health and beauty care retailer and wholesaler based in London.

While Wall Street’s initial response was largely negative, executives of the two companies maintain that the combination, which they describe as "the first global, pharmacy-led health and well-being enterprise," offers tremendous long-term growth opportunities.

The terms of the deal call for Walgreens to pay $6.7 billion (consisting of $4 billion in cash and 83.4 million shares of stock) for the initial 45% holding, with an option to purchase the remaining 55% of Alliance Boots for about $9.5 billion (assuming constant exchange rates and an unchanged Walgreens price per share) in cash and stock, plus the assumption of Alliance Boots’ then-outstanding debt, during a six-month period beginning two and a half years after the initial closing. The first phase of the investment is expected to close by September 1, subject to regulatory approvals.

If Walgreens decides not to exercise the option to buy out Alliance Boots, under certain circumstances its ownership stake will decrease from 45% to 42% in exchange for a nominal consideration to Walgreens.

Walgreens plans to finance the initial cash payment with existing cash and new borrowings. Management expects the transaction to be accretive to Walgreens’ net earnings per diluted share in the first year following completion of the initial step by around 23 cents to 27 cents, excluding onetime transaction costs.

Walgreens chief financial officer Wade Miquelon projected that the combined synergies across both companies will total between $100 million and $150 million in the first year after closing, escalating to $1 billion by the end of 2016. Combined pro forma revenues for 2016 are forecast to reach $130 billion, with LIFO earnings before interest and taxes of $8.5 billion to $9 billion. Net debt (defined as balance sheet debt less cash) is further projected to total $11 billion at that point.

Discussions between the two companies began about 18 months ago, according to Greg Wasson, Walgreens’ president and chief executive officer.

"Our teams, because we don’t operate in each other’s geographies, have actually collaborated on initiatives related to pharmacy and other services over the years, and we were able to see the real cultural fit that comes from these two iconic brands with similar heritages and over 100 years of operation," he said in a conference call at the time of the announcement. "Our folks really worked together well, so we thought that now was the time to really create something new. So we’re thrilled to be putting together an international health care platform to deliver new and unique innovative health care solutions across the world to help patients and payers reduce costs and provide greater access to health care."

Stefano Pessina, executive chairman of Alliance Boots, said that the combination was the culmination of five years’ development since Kohlberg Kravis Roberts & Co. (KKR) invested $2.45 billion (£1.22 billion) in the wholesaler/retailer. It also fulfills his vision of Alliance Boots becoming a global health care leader. "I have always believed that our industry needed a global player," he told analysts. "This deal will change the dynamic of our industry."

The transaction will create the world’s largest prescription drug and health and well-being retailer, with more than 11,000 stores in 12 countries and the largest global pharmaceutical wholesale and distribution network, with over 370 distribution centers supplying more than 170,000 pharmacies, physicians, health centers and hospitals in 21 nations. The new entity will be the world’s largest purchaser of prescription drugs, with the potential of influencing drug pricing in a rapidly changing health care marketplace.

Walgreens and Alliance Boots will continue to operate their various businesses under their current brand names, and Walgreens will maintain its headquarters in Deerfield, Ill., while Alliance Boots will operate its support offices in Europe, including the United Kingdom and its operational hub in Nottingham, England. Because there is no territorial overlap in their operations, no job reductions are expected.

Pessina emphasized the natural and complementary fit between the two companies, noting that Walgreens’ American consumer profile is similar to that of Boots in the United Kingdom. Both chains, moreover, are trusted brands with long and proud heritages. The pharmaceutical wholesale business of Alliance Boots, meanwhile, brings a whole new dimension and perhaps the strongest growth engine to the mix.

"We saw this as an opportunity to strengthen our core business and grow outside the U.S. and in emerging markets," Wasson said during a follow-up investors’ meeting after the initial announcement. The combination does promise to take Walgreens to an entirely different level, from a single-country retail pharmacy operator to a global wholesale and retail powerhouse in the health and well-being sector.

Pessina further predicted during the meeting that the blockbuster deal will spur other big mergers in the industry as other large players begin to seek expansion into new markets.
Upon closing of the initial investment, Wasson and three other Walgreens executives, Miquelon, general counsel Thomas Sabatino, and senior vice president and chief strategy officer Robert Zimmerman, will join the Alliance Boots board. At the same time, Pessina and Dominic Murphy, director and member of KKR, will join the Walgreens board.