* Walgreen buys 45 pct stake in Alliance Boots
* Has option to proceed to full combination in 3 years
* Walgreen, Alliance Boots say won't cut jobs
* Walgreen shares down 6 pct
By James Davey and Phil Wahba
LONDON/NEW YORK, June 19 U.S. drugstore chain
Walgreen Co is taking a 45 percent stake in European
health and beauty group Alliance Boots Holdings Ltd for
$6.7 billion in cash and stock, making a surprisingly big bet on
Europe in the midst of the euro crisis.
The move will create the world's biggest buyer of
prescription drugs and give both companies reach into new
markets. But Walgreen shares were down 6 percent as some
investors were concerned by the decision to expand in Europe.
The deal, the result of talks that began 18 months ago,
marks Walgreen's first move beyond its home market and will give
it more clout with drugmakers at a time it is losing sales
because it no longer fills prescriptions for members of a major
pharmacy benefits manager, Express Scripts Holding Co.
Analysts were surprised by the nature and scope of the deal
given that Walgreen had never made international expansion a
"You're betting the entire company, " said Jeff Jonas,
analyst at Gabelli & Co. "I think if their old strategy had been
working well, they'd be in the Express Scripts network and using
most of their cash to buy back stock."
Standard & Poor's warned that the $3.5 billion in debt
Walgreen will take on for the deal "will result in a meaningful
deterioration of Walgreen's financial risk profile."
Walgreen will pay $4 billion in cash and 83.4 million of its
shares for the stake. The retailer also raised its dividend by
22.2 percent on Tuesday and reported quarterly earnings.
Walgreen stands to benefit from Boots' growing presence in
emerging markets including China. It also plans to sell popular
Boots brands like No. 7 and Soltan, giving Boots the entree into
the U.S. market it has sought for 10 years.
A combination would create a business with more than 11,000
stores in 12 countries and more than 370 distribution centers
delivering to more than 170,000 pharmacies, doctors, health
centers and hospitals in 21 countries.
Walgreen's finance chief, Wade Miquelon, said total sales
could top $130 billion in fiscal 2016. Last year, Walgreen had
sales of $72 billion, while Boots had revenue of 23 billion
British pounds ($36 billion.)
If Walgreen decides to exercise its takeover option in
three years, it will pay $4.9 billion in cash and issue 144.3
million shares for the remaining equity. It will also assume
Alliance Boots' outstanding debt, which was just over 7 billion
pounds at its 2011-12 year-end.
BIG PAYDAY FOR KKR
Alliance Boots was formed by the 2006 merger of Boots, a
fixture on British main streets, and Alliance UniChem, a
pan-European wholesale and retail pharmacy group owned by
executive chairman Stefano Pessina and private equity firm KKR &
The ability to grow was a reason for the deal rather than
taking Alliance Boots public through an initial offering,
Pessina said during a conference call.
"If you do an IPO, you create financial value. If you do a
transformational deal, you create financial value and industrial
value, and you have a lot of synergies," he said.
But both companies said they had no plans for job
KKR bought Alliance Boots in 2007 for 11 billion pounds at
the height of the private equity bubble, sealing the largest
buyout in Europe - a record that stands today.
Should Walgreen follow through with its plan to buy the
remainder of the company, KKR stands to earn 2.7 times its
initial investment, a person familiar with the situation said -
a very good return under current market conditions.
Walgreen said the deal, which will put four of its senior
executives on the Alliance Boots board, is expected to help net
earnings by 23 to 27 cents per diluted share in the first year
Combined synergies across both companies were forecast
between $100 million and $150 million in the first year and $1
billion by the end of 2016.
Walgreen's U.S. retail business has suffered since January,
when it stopped filling prescriptions for members of Express
Scripts, which manages prescription drug benefits for employers
and other clients. The two companies had failed to renew their
In the quarter ended May 31, sales at Walgreen drugstores
open at least a year slipped 6.6 percent. Prescriptions sales in
comparable stores fell 9.9 percent. Having fewer people come in
to pick up a prescription and go instead to rivals CVS Caremark
Corp and Rite Aid Corp also hurt sales of
The fight with Express Scripts hit Walgreen's earnings per
share by 6 cents during the quarter.
Walgreen President and Chief Executive Gregory Wasson sought
to reassure investors the company still expects U.S. growth.
"It is certainly not a 'hail Mary,'" Wasson said of the
deal, using a term for a desperation play in American football.
"We are as bullish on our U.S. business as we have ever been."
Walgreen will maintain its existing headquarters in
Deerfield, Illinois, while Alliance Boots is committed to
current support offices across Europe and keeping its
operational hub in Nottingham, England, where John Boot
established the British half of the business in 1849.
Separately on Tuesday, Walgreen reported third-quarter
earnings of $537 million, or 62 cents per share, compared with
$603 million, or 65 cents per share, a year earlier.
Excluding costs from the Alliance Boots deal, Walgreen
earned 63 cents per share. Analysts, on average, expected
earnings of 62 cents, according to Thomson Reuters I/B/E/S.
Walgreen shares were down 5.9 percent at $30.07 on Tuesday
afternoon on the New York Stock Exchange.