(FROM THE WALL STREET JOURNAL 12/22/14)
By Paul Ziobro
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, including Alex Gourlay,
who will be its president. Analysts also expect Mr. Pessina to be
influential in choosing the next CEO.
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.
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The Week Ahead looks at coming corporate events.
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