Walgreen Co.’s $409 million purchase of drugstore.com, which followed the sale of its pharmacy benefits management division, underlines the chain’s rededication to retailing in all its forms. It also contrasts Walgreens with rival CVS Caremark Corp., which has made pharmacy benefits management a core business.


Walgreens, drugstore.com, Greg Wasson, Dawn Lepore, Geoff Walden, online strategy, pharmacy, CVS Caremark, pharmacy benefits, e-commerce, Sona Chawla, shop online, health and daily living, online customers, Morningstar, Matt Coffina, e-tailing, Internet Retailer, e-tailer, drug store, drug store chain, Internet experience, web sites, Beauty.com, SkinStore.com, VisionDirect.com












































































































































































































































INSIDE THIS ISSUE
News
Opinion
Other Services
Reprints / E-Prints
Submit News
White Papers

Inside This Issue - News

Walgreens gets e-commerce edge with drugstore.com

April 11th, 2011

DEERFIELD, Ill. – Walgreen Co.’s $409 million purchase of drugstore.com, which followed the sale of its pharmacy benefits management division, underlines the chain’s rededication to retailing in all its forms. It also contrasts Walgreens with rival CVS Caremark Corp., which has made pharmacy benefits management a core business.

The drugstore.com acquisition “significantly accelerates our online strategy to leverage the best community store network in America by becoming the most convenient choice for health and daily living needs, whether customers shop online or in our stores,” Walgreens president and chief executive officer Greg Wasson said in announcing the deal last month.

"This acquisition offers a unique opportunity that will provide us immediate access to more than 3 million savvy, loyal online customers and will allow us to move even closer to our existing customers through relationships with new vendors and partners, adding approximately 60,000 products to our already strong online offering,” Wasson stated. “As a result, we are positioned better than ever to be the most convenient multichannel retailer of health and daily living needs in America — offering customers what they want, when they want it and where they want it.”

Walgreens’ decision earlier in March to sell its PBM division for $525 million set it on a different path from CVS Caremark. Now, in essentially taking that money to acquire drugstore.com, “Walgreens has chosen to buy the leading independent online drug store versus maybe trying to grow that business organically,” says Morningstar analyst Matt Coffina.

Given drugstore.com’s history of unprofitability, Coffina adds, the way for Walgreens to make the deal work is to gain purchasing leverage and e-tailing distribution expertise. With more than $456 million in sales in 2010, drugstore.com is ranked as the eighth-largest e-tailer in the United States by Internet Retailer magazine.

Under the terms of the agreement, drugstore.com stockholders will receive $3.80 in cash for each share of stock, which represents an equity value of about $429 million. The price per share is a premium of 102% over drugstore.com’s 30-day average closing stock price and 113% over the closing price of the its stock on March 23, the last trading day before the deal’s announcement.

Walgreens will fund the acquisition with existing cash and anticipates that the deal will close by the end of June. The transaction was unanimously approved by drugstore.com’s board of directors, who recommended that stockholders vote in favor of it.

“We believe the acquisition of drugstore.com by Walgreens is a great fit for all of our constituencies,” said drugstore.com chairman and chief executive Dawn Lepore. “Drugstore.com benefits from this transaction by joining the largest and most trusted drug store chain in the U.S. Our growth strategies are perfectly aligned, and Walgreens will be able to accelerate and expand the investments necessary to achieve our vision and growth opportunities.

“Our goal consistently has been to create value for our customers, employees and shareholders. We believe we have made significant progress over the last six years and built an organization with a broad and deep bench of Internet experience. The opportunity to become a part of Walgreens is the right next step in this journey.”

For her part, Walgreens president of e-commerce Sona Chawla called this “a very exciting time” for the Walgreens e-commerce business.

“Drugstore.com significantly accelerates our multichannel initiatives by expanding our product selection for our customers, adding new capabilities through their well-known beauty and skin care web sites, and joining their talented team with our strong and growing e-commerce organization,” she said.

“Over the past two years we’ve established the infrastructure from which to grow our multichannel products and services, and by combining drugstore.com’s capabilities we are well on our way to achieving our goal of becoming the most convenient multichannel retailer for health and daily living needs.”

Drugstore.com will maintain separate branding of its web sites, including Beauty.com, SkinStore.com and VisionDirect.com. Over the long term Walgreens intends to enhance its multichannel product assortment and the overall customer experience by leveraging drugstore.com’s web sites.

Walgreens said it will maintain drugstore.com’s corporate office in Bellevue, Wash.
The transaction is consistent with Walgreens’ previously outlined capital allocation objectives, which include investing in strategic opportunities that reinforce the company’s core strategies and meet return requirements.

The chain expects the transaction to be dilutive to earnings per share in the fourth quarter of fiscal 2011 by about 3 cents because of transaction-related onetime costs. Based on Walgreens’ intention to reinvest in the business, the company further expects the transaction to be dilutive to earnings per share by 3 to 4 cents in fiscal 2012 and 1 to 2 cents in fiscal 2013.

Approximately 1 cent of the anticipated annual dilution per share is due to the estimated impact of incremental amortization based on purchase accounting assumptions. Walgreens also anticipates a present value cash flow benefit of approximately $80 million associated with the assumption of drugstore.com’s net operating losses.

Advertisement