NEW YORK — As much as the chain drug industry has consolidated, there is room for more mergers and acquisitions. That’s evident from the M&A speculation swirling about the sector in the U.S. and Canada, as well as recent activity.
Lending credibility to the speculation is none other than Walgreens Boots Alliance (WBA) chief executive officer Stefano Pessina.
“I have said many times that I believe that the American markets will go through a substantial wave of consolidation horizontally and vertically,” he commented during the company’s last earnings call. “I have said very clearly that we want to be part of this, at the right time with the right partner. We are open to any kind of combination which could improve the value of our company, and we are looking actively around us to understand which is the best option for us. But please don’t forget that we are looking actively not just in the U.S. but even in other countries, because we consider ourselves a global company.”
Among the investment firms taking Pessina at his word is Cowen & Co. A research report from Cowen says M&A potential bolsters WBA’s appeal as an investment. “Given management’s history of acquisitions, as well as its remarks that it intends to participate in the wave of consolidation, we think that an acquisition is likely,” the report says. “While a deal does not appear imminent, we think that management is likely evaluating these targets and there is a strong possibility that WBA acquires one or more of them in the midterm, adding potential for upside.”
The target of a WBA takeover may well be outside of retailing, according to Cowen, which lists pharmacy benefits manager Express Scripts as a possible candidate.
Deal making has already marked 2015 for WBA rivals CVS Health and Rite Aid Corp. CVS stunningly picked up Target Corp.’s 1,660 pharmacies in June for $1.9 billion, after investing $12.7 billion in Omnicare, a provider of pharmacy services to assisted living and long-term care facilities.
Rite Aid entered the PBM business with the closing of a $2 billion acquisition of Envision Pharmaceutical Services. EnvisionRx also provides integrated mail-order and specialty pharmacy services, among other offerings.
North of the border, Rexall Health is being viewed as an acquisition target, even perhaps for WBA. The operator of 460 stores is also seen as a possible pickup for CVS or Walmart, although a likelier prospect is a purchase by a Canadian retailer. Prospective buyers include Empire Co., which owns the Sobeys and Safeway supermarket chains and Lawtons Drugs; or grocer and Brunet pharmacy chain owner Metro Inc. Empire is viewed as the leading candidate, in part because Lawtons units are in Atlantic Canada, where there is no overlap with Rexall. (Another scenario has Rexall, Lawtons and Jean Coutu Group being purchased as a package, giving the buyer a national chain, with nearly 1,000 stores, in one fell swoop.)
The prospects of a deal were boosted by this year’s naming of former Shoppers Drug Mart CEO Jürgen Schreiber to head Rexall, according to National Bank Financial analyst Vishal Shreedhar.
“We believe that part of [Schreiber’s] compensation is equity-based, which is supportive of an acquisition,” Shreedhar wrote, while noting that a purchase could take years as the new CEO seeks to bolster Rexall’s sales and profits.
“In our view, [Schreiber’s] near-term aspiration will be to improve operational and financial performance at Rexall Health … Any sustainable increase in profitability would ultimately deliver a higher price for Rexall Health,” Shreedhar said in a report.