Walgreens teams up with Europe's Boots: a new prescription

Article by: THE ECONOMIST
Updated: June 24, 2012 - 2:26 PM

The two huge pharmacy chains will become even bigger in what will be a $9.5 billion deal completed over three years.

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Other American executives may be fretting about Europe. Not so Greg Wasson, the chief executive of Walgreens, the United States' biggest pharmacy chain.

Last week his firm said it would buy 45 percent of Alliance Boots, Europe's largest player in the drugs-distribution business. And the $6.7 billion bid is only the first part of a bigger deal. If all goes as planned, Walgreen Co. will pay about $9.5 billion for the rest of Alliance Boots within three years -- creating what the bosses of both firms call (take a deep breath) "the first global pharmacy-led health and well-being enterprise."

The merged firm will indeed be more global than any pharmacy chain before. Walgreens has 8,000 stores in the United States, with sales of $72 billion in fiscal 2011. Alliance Boots is a giant in Europe and beyond. The firm, which generated sales of $40 billion in fiscal 2011, operates in more than 25 countries and has more than 3,000 pharmacies.

Together, Walgreens and Alliance Boots will be the world's biggest buyer of prescription drugs.

For Walgreens, the deal follows a fitful year. A spat with Express Scripts, which manages drug costs for employers, meant that Express Scripts' customers had to fill their prescriptions elsewhere. Sales in the most recent quarter were 3.4 percent lower than in the same period last year, and the number of prescriptions filled dropped by 8.4 percent.

What's in it for them

Although too big to be considered a direct response to these problems, the deal with Alliance Boots gives Walgreens a path to growth after this rough patch.

As for Boots, it is best known for its ubiquity in Britain. In 2006 it merged with Alliance UniChem, a European drugs wholesaler and distributor. One year later Stefano Pessina, the firm's executive chairman, and KKR, a private-equity firm, took the company private. The leveraged buyout, which was worth $22.2 billion at the time, remains Europe's biggest.

The deal with Walgreens fulfills Pessina's ambition to bring Boots to America. The country's drugs market is the world's biggest and has formidable established pharmacy chains, including, in addition to Walgreens, CVS and Rite Aid.

"It would be suicide to come in and compete with these guys," Pessina told reporters in May. Now he does not have to.

The benefits of the merger are many, at least according to Wasson and Pessina.

They say that they will use their combined expertise and strength to streamline distribution and squeeze discounts from generic drugmakers.

Boots will be able to sell its products, such as the No7 beauty line, at Walgreens' U.S. stores.

Walgreens, meanwhile, will benefit from Boots' product-development teams and global reach. Even without additional deals, the merged firm hopes to reach revenues of $130 billion by 2016, with about one-third coming from operations outside the United States.

Some skepticism

Not everybody is convinced. It is hardly an opportune time to invest in Europe, skeptics say.

Walgreens' share price dipped by 5.9 percent on the day of the announcement. Standard & Poor's, a ratings agency, worries about the debt Walgreens will shoulder. In the first stage of the deal the firm will assume $3.5 billion; in the second stage it will take on the rest of Alliance Boots' outstanding debt, which amounted to more than $10 billion in March.

The debate about the merits of the deal is likely to go on for some time. Yet there is already one clear winner.

KKR invested $1.87 billion in 2007. In the first stage of the Walgreens deal, KKR will receive $1.87 billion and $218 million in shares. If the full acquisition proceeds as expected, the private equity firm will more than double its money -- not bad for an investment framed by a financial collapse and the euro crisis.