Walgreens, Boots to form new U.S.-based company

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Proceeding with the next step in their strategic partnership, Walgreen Co. and Alliance Boots GmbH are forming a new holding company — based in the United States — in line with their vision to create the first global pharmacy-led, health and well-being enterprise. Called the Walgreens Boots Alliance, the new company will be led by Walgreens president and CEO Greg Wasson, with Alliance Boots executive chairman Stefano Pessina serving as executive vice chairman.

DEERFIELD, Ill. — Proceeding with the next step in their strategic partnership, Walgreen Co. and Alliance Boots GmbH are forming a new holding company — based in the United States — in line with their vision to create the first global pharmacy-led, health and well-being enterprise.Walgreens said Wednesday that the new company, Walgreens Boots Alliance Inc., will encompass four divisions: Walgreen Co.; Boots, the United Kingdom and Republic of Ireland’s largest pharmacy, health and beauty retailer; Pharmaceutical Wholesale and International Retail, including Alliance Healthcare, Europe’s largest pharmaceutical wholesaler; and Global Brands. The combined company also is setting up a cross-divisional global pharmacy market access group.

Plans call for the combined enterprise to be led by senior management from both companies, with Walgreens president, chief executive officer and board member Greg Wasson to serve as president and CEO of Walgreens Boots Alliance. Stefano Pessina, executive chairman of Alliance Boots, will become executive vice chairman of the combined company, responsible for strategy and M&A and reporting to Wasson. Pessina also will serve as chairman of a new strategy committee of the board of directors. Current Walgreens chairman Jim Skinner will be nonexecutive chairman of the board for the combined company.

Walgreens and Alliance Boots announced their landmark partnership in June 2012. The two-step agreement called for Walgreens to acquire a 45% equity interest in Alliance Boots for $6.7 billion in cash and stock, a transaction that was completed in August 2012, and then to have the option to buy the remaining 55% of the company in about three years for $9.5 billion in cash and stock.

Walgreens said Wednesday that it expects to close step two of the transaction in the first quarter of calendar 2015. Under the terms of the revised agreement, the period during which Walgreens can to exercise its option to acquire the rest of Alliance Boots, for about $5.29 billion and approximately 144.3 million shares of Walgreens common stock, has been moved up to begin on Aug. 5, 2014, and end on Feb. 5, 2015. Via the agreement, Walgreens exercised the option through an affiliate on Aug. 5.

The Walgreens Boots Alliance holding company will be based in the Chicago area, with the headquarters of Walgreens’ operations to remain in Deerfield, Ill. Boots operations also will remain based at its current location in Nottingham, U.K.

“We are excited to move forward with the next important step in becoming a new kind of global health care leader,” Wasson said in a statement. “Expanding globally with Alliance Boots will make quality health care more affordable and accessible to communities here in America and around the world. In addition, Stefano and I are pleased with the comprehensive plan we’ve announced today as part of step two. These elements will provide additional shareholder value creation, both in the near and long term. I congratulate our teams for getting us to this point and together we have a bright future.”

The new enterprise marks “the most significant milestone in the history of Alliance Boots” and represents “a very positive step for the health care industry as a whole,” according to Pessina.

“Together with Walgreens, we have already made good progress over the past two years, and I strongly believe that the merger will bring significant growth opportunities for both mature and emerging markets,” Pessina stated. “Today’s announcement reflects the great track record and accomplishments of our people to date, and I am convinced that their skills, expertise and commitment will continue to make a positive contribution in the years to come. This combination is a true partnership, further evidenced by the composition of the future management team of Walgreens Boots Alliance.”

In recent months, the Walgreens-Alliance Boots partnership has been in news headlines about companies pursuing a controversial maneuver known as an inversion, in which a U.S.-based business acquires or merges with a foreign company and is domiciled overseas but keeps its operations in the United States, in turn realizing significant tax benefits. Walgreens reportedly would have saved $4 billion in taxes by redomiciling in Switzerland, where Alliance Boots has its headquarters.

Walgreens said Wednesday that it explored an inversion transaction and considered a wide range of issues, including the financial benefits and their sustainability and the technical viability of a restructured inversion transaction under U.S. law. The company noted that it also “was mindful of the 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,” such as Medicare.

“In line with our fiduciary duty to the company and our shareholders, we undertook an extensive and rigorous analysis with a team of leading experts to determine the most optimal — and sustainable — course of action,” Wasson explained. “We took into account all factors, including that we could not arrive at a structure that provided the company and our board with the requisite level of confidence that a transaction of this significance would need to withstand extensive IRS review and scrutiny. As a result, the company concluded it was not in the best long-term interest of our shareholders to attempt to redomicile outside the U.S.”

As part of step two of the partnership, the Walgreens Boots Alliance announced a new management team.

Ornella Barra, chief executive of wholesale and brands of Alliance Boots, will become executive vice president of Walgreens Boots Alliance and president and CEO of global wholesale and international retail. Jeff Berkowitz, president of Walgreens Boots Alliance Development GmbH, the partnership’s joint venture formed in October 2012, will serve as executive vice president of Walgreens Boots Alliance and president of pharma and global market access, which will include responsibility for specialty pharmacy. Alex Gourlay, Walgreens’ president of customer experience and daily living, will become executive vice president of Walgreens Boots Alliance and president of Walgreens.

Tim McLevish, announced Monday as Walgreens’ executive vice president and chief financial officer, will serve in that role in a global capacity for Walgreens Boots Alliance.
Ken Murphy, managing director, health and beauty international and brands of Alliance Boots, will serve as executive vice president of Walgreens Boots Alliance and president of global brands. Simon Roberts, managing director of health and beauty U.K. and the Republic of Ireland for Alliance Boots, will serve as executive vice president of Walgreens Boots Alliance and president of Boots.

Tom Sabatino, Walgreens’ chief administrative officer and general counsel, will serve as executive vice president and global chief legal and administrative officer of Walgreens Boots Alliance. Tim Theriault, chief information, innovation and improvement officer at Walgreens, will assume the role of executive vice president and global chief information officer of Walgreens Boots Alliance. Kathleen Wilson-Thompson, Walgreens’ chief human resources officer, will become executive vice president and global chief human resources officer of Walgreens Boots Alliance.

The company will outline a new three-year plan through fiscal 2017 that sets strategic goals for the Walgreens Boots Alliance. In turn, the company is setting a new adjusted earnings per share goal for fiscal 2016 of $4.25 to $4.60. That goal includes accelerated cost-reduction initiatives that target $1 billion in savings by the end of fiscal 2017.

Walgreens’ board also has authorized a new capital allocation policy that includes a $3 billion share repurchase program through the end of fiscal 2016. In addition, the board declared a 7.1% quarterly dividend increase to 33.75 cents per share.

Overall, the Walgreens Boots Alliance will have more than 11,000 stores in 10 countries and a wide-ranging portfolio of retail and business brands as well as global health and beauty product brands. The entity will be the world’s largest pharmaceutical wholesale and distribution network, with more than 370 distribution centers delivering to more than 180,000 pharmacies, doctors, health centers and hospitals in 20 nations.

Walgreens added that the combined company will be the world’s largest purchaser of prescription drugs and many other health and wellness products, enabling Walgreens and Alliance Boots to expand the supply and address the escalating cost of prescription drugs in the United States and worldwide.

“As we launch our global plan, we are more focused than ever on what it will take to compete and succeed on the world stage,” Wasson commented. “We are uniquely positioned to be a leader and a champion for accessible, affordable health care, and that means continuing to innovate, to find new ways to be as efficient as possible, and more agile and nimble as we compete in the worldwide market. We also are encouraged by the improving performance of our daily living business and the further potential of our expanded beauty and own brands portfolio to drive margin expansion.”

He added, “This is a pivotal moment in Walgreens’ history as we venture ahead from the best corners in America to the four corners of the world. In a changing global marketplace with new opportunities and challenges, we will serve our communities, our country and the world in ways we could never have imagined even a few years ago.”

Walgreens shares plunged Wednesday morning, falling as low as $57.75 before recovering slightly, after having closed at $69.12 on Tuesday. The stock had already been declining from the low to mid 70s as news reports emerged indicating that the inversion and the lucrative tax benefits, highly anticipated by investors, likely would not be realized.

However, William Blair & Co. analyst Mark Miller pointed out in a research note Wednesday that investors are disappointed in not just the foregone inversion but also in Walgreens’ scaled-back growth forecast.

“The expected double-digit percent downward move in the shares Wednesday morning reflects a significantly lower outlook for organic profit growth. Fiscal 2016 adjusted EBIT guidance for $7.2 billion is 15% to 20% lower than the original $8.5 billion to $9 billion envisioned for fiscal 2016 when Walgreens announced the planned acquisition for Alliance Boots in June 2012,” Miller wrote. “With the update this morning, the company lowered its long-term EPS objective to $4.25 to $4.60 and announced that the company will not pursue a tax inversion.”

Miller said William Blair & Co. is reviewing its EPS estimates for Walgreens but expects an EPS reduction of about 25 cents to its incoming fiscal 2016 projection of $4.60.

“For shares to outperform from levels prior to the strategic update, we have felt the fiscal 2016 outlook needed to surpass the Street consensus of $5, if not upside beyond $5.50 with a corporate inversion,” Miller stated. “We anticipate intense selling pressure Wednesday morning to be exacerbated by significant hedge fund stock ownership. For long-term investors, we perceive Walgreens has opportunities to invest free cash flow in accretive acquisitions, enhanced by the combined company’s global platform and integrated retail/wholesale model.”


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