Shares of Walgreen Co. fell 14.3 percent Wednesday as investors were disappointed that the retailer will remain based in the U.S. following its $5.29 billion acquisition of the remainder of Alliance Boots GmbH, a move that also had the company lowering guidance for fiscal year 2016.
Walgreen shares on Wednesday closed at $59.21 in trading on the New York Stock Exchange.
Exercising its option to acquire the 55 percent stake in Alliance Boots it didn’t already own was expected back in May. The deal, expected to close in the first quarter of 2015, is a cash and stock transaction that involves 3.13 billion pounds, or $5.26 billion, in cash and 144.3 million shares of Walgreen common stock. The company initially acquired a 45 percent equity stake in Alliance Boots in a cash-and-stock deal — $4 billion cash and 83.4 million shares — valued at $6.7 billion in fall 2012.
The planned transaction, which will create a global pharmacy-led retailer with more than 11,000 stores in 10 countries, as well as establish the world’s largest pharmaceutical wholesale and distribution network, is still subject to shareholder and regulatory approvals.
Under the new structure, the company will be renamed Walgreens Boots Alliance. Greg Wasson will be president and chief executive officer of the combined entity, positions he currently holds for Walgreens. Stefano Pessina, executive chairman of Boots, will become executive vice chairman of the combined entity responsible for strategy and M&A, reporting to Wasson. He will also be chairman of a new strategy committee of the company’s board. Jim Skinner will serve as non-executive chairman of the combined firm.
The new holding company for the combined entity will be headquartered in Chicago, with Walgreens operations based in Deerfield, Ill., and Boots remaining based in Nottingham in the U.K.
Some shareholders had been pushing for the company to move overseas to lower its tax rate, a move called tax inversion. For some time, there was a sense that Walgreens might be leaning toward the move even as critics complained it would be un-American. Some have suggested that federal tax rules should be changed to eliminate the incentives for an inversion and instead provide benefits to companies who remain based in the U.S. to help create more jobs for American citizens. The Obama administration is considering options to curtail relocations for taxation purposes.
In a conference call Wednesday to Wall Street analysts, Wasson said, “We consider benefits such as substantial financial advantages, competitive considerations and future M&A opportunities.” He explained that the risks included possible protracted litigation with the Internal Revenue Service that could go on for “three to 10 years,” potential for dual taxation in the intervening years, and consumer backlash and political ramifications.
Walgreens’ official statement regarding its decision cited “ongoing public reaction to a potential inversion and Walgreens unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs.”
Connected to the merger, Walgreens is initiating a three-year plan that includes an acceleration of a $1 billion cost-reduction plan at the corporate, field and store levels to establish a more efficient global platform, and a capital allocation policy that includes pursuing strategic opportunities including mergers and acquisitions and a new $3 billion share repurchase program through the end of fiscal year 2016.
Walgreens’ guidance for fiscal 2016 calls for revenue of between $126 billion and $130 billion and adjusted earnings per share of $4.25 to $4.60.
Deutsche Bank Securities Inc. analyst George Hill, in early reaction to a Walgreens’ Boots update, said of the transaction that “at best [it] could be considered extremely disappointing and could lead to significant pressure on the shares.”
The adjusted EPS range is below Hill’s estimate of $4.98 and Wall Street’s consensus of $5.08, he noted, adding that the company’s updated guidance would imply fiscal 2016 adjusted operating earnings in the range of $7.3 billion to $7.8 billion. That’s below Hill’s current estimate of $8.2 billion and lower than Walgreens’ earlier guidance range of $9 billion to $9.5 billion.
“In short, we believe this guidance would imply an earnings erosion at the underlying business that we are at a loss to explain,” he said.
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