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Walgreen deal could prove to be good medicine for Boots

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Photo credit: Oli Scarff/Getty Images

Photo credit: Oli Scarff/Getty Images

Getty Images

Photo credit: Oli Scarff/Getty Images

Popping into the local Boots chemists for some hair gel or a badly needed replacement sachet of fake tan, the average punter would be forgiven for thinking that he/she is boosting the profits of a long-established British retail chain. But Boots is a more complicated organisation these days. As a result of some impressive financial engineering over the past decade, it is now an important but minor element of the world’s first global retail and wholesale pharmacy business, which within the next few months will be fully integrated as the Walgreen Boots Alliance (WBA).

Its American parent, Walgreen, last month snapped up the shares it did not already own in the European market leader Alliance Boots and paid $6.7bn (€5.2bn) for the privilege.  Walgreen Boots Alliance will pretty much rule the world as far as retail and wholesale pharmacy is concerned.

The new entity has an astonishing 11,000 stores in 10 countries and distributes in 20 nations. It is the world’s largest purchaser of prescription drugs, supplying 180,000 pharmacies around the globe.

Walgreen alone serves six million customers daily and dispenses 820 million prescriptions annually in its 8,600 stores. It has sales of $72bn, profits of $2.5bn, and stores in every state in the USA. It employs almost a quarter of million people and is valued at $58bn. Walgreen’s shares, at $64, are up 27pc on the year. It had a record free cash flow of $3bn.

You have to be up early and be an avid reader of the financial press to keep pace with the changes that are happening to companies like Boots. The company we knew a few years ago as Alliance was a European pharmacy distribution business which got steadily larger in the 1990s before swooping on Boots about a decade ago, becoming Alliance Boots.  In 2007, a private equity group bought Alliance Boots for £11bn; at the time the largest buyout in Europe. What Walgreen has bought is an organisation with 3,300 retail operations in 11 countries,  and the European leader in health and well-being with sales of €23bn and profits of €1.3bn.

Following the acquisition, Alliance Boots moved its domicile to a low-tax area in Switzerland. But Walgreen is retaining its headquarters in Chicago, which will help it avoid the wrath of Barak Obama, who has made no secret of his dislike of American companies re-domiciling themselves for tax purposes. By deciding not to move its tax residence to Switzerland, WBA will be foregoing tax savings estimated at $4bn over five years. However, keeping sweet with Obama and the American health system won’t do the group any harm.

The new structure promises no overlap between the constituent divisions of the enlarged group. It also says that no job losses are anticipated.

WBA hopes to get immediate benefits of $1bn savings as a result of increased group purchasing power, and expects a further $1bn by improving margins and selling its own brand products.  The short-term impact on Boots will be minimal and its HQ will still be in the UK. It is likely that Boots products, particularly its No 7 range, will become more visible within the new group.  The deal is not cheap but consolidation makes sense.

Looking ahead, the company has announced a ‘new chapter’ strategic plan for the next three years. It also proposes a $3bn share repurchasing scheme; $1bn in 2015 and $2bn in 2016. Best indications for the new company are revenues of $127bn and earnings-per-share of $4.25.

The near term could be challenging, given the risks of integration. The long-term outlook is positive, as the company is well positioned to drive growth given its global scale, supply chain, potential for cost reductions and cross-selling. Assuming the deal is approved by all parties, Walgreen Boots Alliance shares will be worth tracking. 

NOTHING IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER EXPLICIT OR IMPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED

Online Editors