Walgreen Co. has wasted no time in following up on its blockbuster deal with Alliance Boots.

Walgreen Co., Alliance Boots, USA Drug, Stephen L. LaFrance, pharmacy chain, Super D Drug, May’s Drug, Med-X and Drug Warehouse, Greg Wasson, Alliance Boots, Stephen LaFrance, drug store, Jeffrey Woldt, Mark Miller, William Blair & Co.

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Walgreens agrees to buy USA Drug

July 5th, 2012

DEERFIELD, Ill. – Walgreen Co. has wasted no time in following up on its blockbuster deal with Alliance Boots.

The nation’s largest drug chain on Thursday said it plans to acquire the USA Drug pharmacy chain, which operates 144 stores, mostly in the Mid-South, under the USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse banners, from Stephen L. LaFrance Holdings Inc. and members of the LaFrance family.

Walgreens will pay approximately $438 million, subject to adjustment in certain circumstances, for the assets.

The stores, located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee, will significantly strengthen Walgreens’ presence in the Mid-South. The acquisition includes corporate offices, a distribution center located in Pine Bluff, Ark., and a wholesale and private brand business.

"This acquisition expands our business in an important region of the country," Walgreens president and chief executive officer Greg Wasson said in a statement. "It will provide significant new pharmacy business for us in this region while also enabling us to bring the Walgreens experience to many additional smaller communities where USA Drug has developed strong operational expertise."

The transaction is expected to close around Sept. 1, according to a Walgreens spokesman, who added that the company does not expect the transaction to have a material impact on earnings per share in fiscal year 2012.

"What is now USA Drug began from a single store I opened in Pine Bluff in 1968 and has grown to more than 140 stores in seven states," stated Stephen LaFrance, chairman and owner of Stephen L. LaFrance Holdings, whose drug stores recorded sales of $825 million in 2011. "We chose to sell our business to Walgreens not only because it is the premier drug store company in our industry, but also because Walgreens will continue to provide our customers with the service and products they have come to expect.

"I have loved every minute of my career these past 44 years, beginning as a pharmacist, then management and currently as owner and chairman," LaFrance added. "From the bottom of my heart, I would like to thank everyone who has been a part of my success: my vendors, bankers, partners, employees, family and, most importantly, my customers. I want to thank all of them for placing so much trust and faith in me. Without them, none of what I have accomplished would have been possible."

The Walgreens spokesman said that, in the near term, the acquired drug stores will continue to operate under their current brand names after the transaction closes, and decisions will be made over time regarding the most effective way to harmonize Walgreens and the acquired brands.

Analyst Mark Miller of William Blair & Co. called the USA Drug acquisition a "no-brainer" for Walgreens.

"Walgreens will pay $438 million in cash for a business that generated $825 million in sales during 2011 and was profitable, according to management. Walgreens expects to operate the stores under the existing banners for a time, although we anticipate some stores will be closed (with pharmacy files transferred) and remaining stores should ultimately be converted to Walgreens (similar to the Happy Harry’s acquisition)," Miller wrote in a research note Thursday.

More deals also may be on the way from Walgreens, Miller added. "Based on our conversation with Walgreens this morning, we understand that more acquisitions of U.S. drug stores and pharmacy files should be expected. PBM consolidation and reimbursement pressures have created added incentive for many of these operators to sell, and Walgreens’ procurement advantages with generics increases the earnings synergy potential," he stated. "While the jury is still out on the Alliance Boots estimates, and it will take years to weigh the trade-offs, the USA [Drug] acquisition is a no-brainer, in our view, given the synergy potential, the good geographic fit (with locations mostly in the Southeast), and the incremental U.S. retail share/leverage potential gained."

The deal isn't the first between Walgreens and USA Drug. In March 2010, Walgreens acquired prescription files and other assets of 17 Ike's and Super D drug stores in the Memphis, Tenn., area from USA Drug.

*Editor's Note: Article updated with analyst comment.

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