Walgreen Prepares to Steer a Global Course
Shareholder Vote Nears on Merger With European Counterpart Alliance Boots
DAN PAGE
Walgreen Co., the largest U.S. drugstore chain by number of stores, is going to find out if bigger means better.
Next week, Walgreen shareholders will vote on whether to complete a merger with Alliance Boots GmbH, which runs the U.K. drugstore chain Boots and a vast drug-distribution business in Europe. On Tuesday, Walgreen will release its latest earnings report.
The merger would expand Walgreen from a U.S. operation with 8,200 locations to a global one, doing business in more than 10 countries with more than 11,000 total locations.
It will make the combined company the largest purchaser of prescription drugs in the world, giving it more leverage in negotiations with drug suppliers to lower the costs of the hundreds of millions of prescriptions it fills annually.
But with the marriage will come some new challenges. The leadership of the combined company is up in the air. Walgreen’s current chief executive, Greg Wasson , is retiring when the deal closes early next year. Pending a formal search, Alliance Boots Executive Chairman Stefano Pessina will serve as acting CEO.
Though Walgreen is doing the buying, the deal hardly looks like a takeover. Mr. Wasson’s retirement, along with the earlier departure of finance chief Wade Miquelon, means that two of the architects of the deal won’t be around to chart the course of the new company, to be called Walgreens Boots Alliance.
In fact, new executives and top management from Alliance Boots will be holding some of the key positions at the new company, including Alex Gourlay, who will be its president. Analysts also expect Mr. Pessina to be influential in choosing the next CEO.
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That’s not necessarily bad. Credit Suisse analyst Edward Kelly said recently that given Walgreen’s underperformance in the past few years, including a significant cut in its fiscal 2016 profit forecast, shareholders will welcome greater input from the Alliance Boots side.
Walgreen unexpectedly lowered its 2016 forecast in August after acknowledging that it failed to account for the rising cost of generic drugs in new prescription-drug contracts. Walgreen shares fell sharply at the time but have since recouped those declines and are up around 27% this year.
Investors will get a closer look at Walgreen’s condition Tuesday, when the company reports fiscal first-quarter earnings. Analysts recently polled by Thomson Reuters project Walgreen’s per-share earnings will rise 4% from a year earlier to 75 cents, while sales are expected to rise 6% to $19.5 billion.
Walgreen and Alliance Boots came together in 2012 when the U.S. company bought a 45% stake in its European counterpart for $6.7 billion in cash and stock. After two years the companies had the option to fully merge, and decided in August to go ahead with the second part of the merger, a $14.7 billion deal.
Cementing the union hasn’t been without difficulties. Investors earlier this year pushed hard for Walgreen to consider relocating its headquarters abroad in the process so that income earned by offshore operations of Alliance Boots wouldn’t be subject to U.S. taxes. Ultimately Walgreen decided against that structure after an intense internal debate.
Walgreen shareholders are slated to vote on the deal Dec. 29. There should be little drama in the vote. The two prominent shareholder advisory firms, Glass, Lewis & Co. and Institutional Shareholder Services Inc., have given the deal their blessing. Mr. Pessina, Walgreen’s largest shareholder, with a 7.7% stake, is required to vote in favor of the deal.
