June 25, 2024

DealBook: Walgreens to Take Stake in Alliance Boots for $6.7 Billion

A Boots pharmacy in central LondonSergio Dionisio/Associated PressA Boots pharmacy in central London.

7:20 p.m. | Updated

Two big retail chains on opposite sides of the Atlantic are betting that prescriptions, paper towels and nail polish are global goods.

On Tuesday, the American drugstore chain Walgreen Company agreed to buy a 45 percent stake in Alliance Boots, the European pharmacy retailer, for $6.7 billion, in a deal that will allow both companies to extend their worldwide reach.

Walgreen, which could gain full control of the company by 2015, can take advantage of Alliance Boots’ operations in Europe and several emerging markets. Alliance Boots gets a long-sought foothold in the United States.

The deal will create one of the world’s largest drugstore and pharmacy retailers, with more than 11,000 stores in 12 countries, as well as a wholesale pharmaceutical business with operations in 21 countries.

“This is a chance to create the world’s first truly global pharmacy and health care enterprise,” Gregory Wasson, chief executive of Walgreen, said in an interview. “There’s nothing else out there that can match it.”

The deal represents the latest strategic maneuver by Alliance Boots’ executive chairman, Stefano Pessina, to turn the European company into a global retailer.

Over the years, the Italian billionaire has expanded Alliance Boots through a number of international acquisitions. In 2006, he helped secure a $12 billion merger between Boots and a rival, Alliance Unichem.

A year later, he joined forces with the private equity firm Kohlberg Kravis Roberts to acquire Alliance Boots for $22 billion in the Continent’s biggest leveraged buyout.

In recent months, Mr. Pessina pursued an acquisition or merger, either in Asia or in North America, to continue Alliance Boots’ international expansion, according to a person with direct knowledge of the matter.

“If we want to be a global company, we need a presence in the U.S.,” Mr. Pessina, who will reinvest his proceeds from the deal to gain an 8 percent stake in Walgreen, said in an interview. “We will continue our expansion into new markets in Asia and Latin America.”

Under the terms of the deal, Walgreen will buy a 45 percent stake in Alliance Boots for $4 billion in cash and another $2.7 billion in company stock. Kohlberg Kravis Roberts, which had invested $1.8 billion in Alliance Boots, said it would receive $1.8 billion in cash and around $200 million in Walgreen stock.

The drugstore chain has the option to buy the remaining 55 percent stake in Alliance Boots three years after the deal closes, for $9.5 billion in cash and stock. If that happens, Walgreen would also assume the European company’s debt, which currently stands around $11 billion. The final price might vary depending on the performance of Walgreen’s shares and foreign exchange fluctuations.

The deal comes as Walgreen faces weakness in its home market. On Tuesday, the company reported an 11 percent drop in its earnings, to $537 million, for the three months through May 31.

Walgreen shares closed about 5.8 percent lower in New York.

The deal is the latest in a flurry of acquisitions of European targets by American companies. So far this year, the combined value of European mergers and acquisitions, excluding Walgreen’s acquisition of Alliance Boots, has reached $99.5 billion, according to the data provider Dealogic. Companies in the United States account for around 43 percent of the acquirers.

The $99.5 billion figure is a 21 percent decline over the same period in 2011, but is higher than the combined $72.7 billion of deals so far this year in the United States.

As part of the deal, Mr. Pessina of Alliance Boots and Dominic Murphy, a partner at Kohlberg Kravis Roberts, will join Walgreen’s board, while Mr. Wasson of Walgreen and several of the company’s executives will join the Alliance Boots board.

Walgreen said it expected annual costs savings of up to $150 million in the first year, and as much as $1 billion in savings by the end of 2016. The deal is expected to close by Sept. 1.

Goldman Sachs, Lazard and the law firms Wachtell, Lipton, Rosen Katz and Allen Overy advised Walgreen, while Centerview Partners and the law firms Darrois Villey Maillot Brochier and Simpson Thacher Bartlett advised Alliance Boots.

This post has been revised to reflect the following correction:

Correction: June 19, 2012

An earlier version of the story incorrectly said the deal is expected to close by the end of September. It is expected to close by September 1.

Article source: http://dealbook.nytimes.com/2012/06/19/walgreens-to-take-45-stake-in-alliance-boots-for-6-7-billion/?partner=rss&emc=rss

Walgreen Profit Drops on Express Scripts Fight

NEW YORK (AP) — Drugstore operator Walgreen Co.’s fiscal first-quarter earnings fell more than 4 percent due in part to a slow flu season and its decision to leave the Express Scripts Inc. pharmacy network next month.

President and CEO Greg Wasson said during a conference call with analysts that Walgreen last week made “one last attempt” to come to terms with Express Scripts on a new contract. He said the companies were unable to resolve their differences over the rates that Express Scripts pays Walgreen to fill prescriptions but that Walgreen remains open to a reasonable offer from Express Scripts.

A three-year contract between the companies ends Dec. 31, and since June, Walgreen and Express Scripts have said they were preparing to stop doing business. Walgreen gets $5.3 billion in annual revenue from Express Scripts, but the Deerfield, Ill., company has said it would rather give that up than continue filling unprofitable prescriptions.

“While we remain open to any fair and competitive offer from Express Scripts, we firmly believe that accepting their proposal was not in the best long-term interests of our shareholders,” Wasson said in a statement.

Shares of Walgreen fell $2, or 6 percent, to $31.50 in morning trading while the broader markets edged down less than 1 percent.

The nation’s largest drugstore chain said the decision to stop doing business with Express Scripts cost a penny per share in sales at pharmacies open at least a year and a penny per share in expenses during the first quarter.

It also said a delay in the cough, cold and flu season hurt earnings by another penny per share. The company administered 5 million flu shots through Nov. 30 compared with 5.6 million a year ago.

Walgreen said its quarterly net income fell to $554 million, or 63 cents per share, from $580 million, or 62 cents per share, a year ago, when it had more shares outstanding. Revenue grew 4.7 percent to $18.16 billion.

Analysts surveyed by FactSet expected, on average, earnings of 67 cents per share and $18.24 billion in revenue.

Walgreen is trying to keep as many of those prescriptions as possible by making its own arrangements with companies and health plans. Based on prescriptions Walgreen is filling in December and other trends, the company says it expects to keep 97 to 99 percent of its fiscal 2011 prescription volume in the new fiscal year. Analysts estimate that Walgreen will lose most of the Express Scripts prescriptions.

Express Scripts also is trying to buy Medco Health Solutions Inc., another large pharmacy benefits manager. If that deal goes through, Walgreen may lose Medco’s clients over time.

Walgreen’s first-quarter selling, general and administrative expenses also climbed 5 percent to $4.2 billion because of its acquisition of drugstore.com and other items.

Earlier this month, Walgreen said sales at stores open at least a year grew 2.5 percent during the quarter. However the Express Scripts fight reduced those sales by 1.1 percent. Sales at stores open at least a year are considered a key measurement of retailer health because they exclude results from stores that have opened or closed in the last year.

The company operates 7,812 drugstores nationwide.


Tom Murphy contributed to this story from Indianapolis.

Article source: http://feeds.nytimes.com/click.phdo?i=1671967999b9929ce9ecdbf3186ac053

Pressure Grows to Unwind CVS Merger

The four-year-old merger of the drugstore chain and the pharmacy benefit manager is the subject of an investigation by the Federal Trade Commission and a multistate inquiry by the attorneys general of 24 states, according to earlier disclosures by CVS Caremark.

The company says it is “cooperating fully” with the inquiries. “We remain confident that our business practices and service offerings are being conducted in compliance with antitrust laws,” said Carolyn Castel, a company spokeswoman.

But on Thursday, five consumer groups wrote a letter to Jon Leibowitz, the commission’s chairman, claiming “there is strong evidence that the CVS Caremark merger has harmed consumers.”

The groups, which called for breaking up the $27 billion merger, also accused the company of using confidential patient information from Caremark, which manages prescription benefits for health plans, to steer consumers to CVS pharmacies.

The company’s practices effectively gave CVS an unfair advantage over other pharmacies, reducing competition and limiting consumer choice, according to the letter, which was signed by Community Catalyst, Consumer Federation of America, Consumers Union, the National Legislative Association on Prescription Drug Prices and U.S. Pirg.

CVS Caremark denied accusations that it had engaged in improper business practices, saying the charges were “false, unfounded and misleading.” It defended its privacy protections, saying it maintained a firewall to ensure that Caremark and CVS did not share “certain competitively sensitive information,” Ms. Castel said in an e-mail. The company did not improperly steer patients to CVS pharmacies, she said. She also said “there are no plans to split up the company.”

A spokeswoman for the F.T.C., Cecelia Prewett, confirmed that the commission had received the letter, but said it could not comment on an open investigation.

For the last several years, some consumer groups as well as independent pharmacists, who have argued that they are now at a competitive disadvantage, have been calling for regulators to review the merger. Some investors have also been frustrated by the lack of financial results from the merger, and some industry analysts are saying the company would be valued more by investors as two distinct businesses. CVS Caremark had revenue of $96.41 billion in 2010, down from $98.73 billion in 2009.

At the time of the merger, executives emphasized that the combined firm would prove itself to be more attractive to investors as well as health plans and consumers.

“The real synergy here is the top line synergy, the revenue synergy,” said Thomas M. Ryan, then chief executive of CVS, when the merger was announced. “That’s how we’re going to win this game.”

Although CVS Caremark asserts that the merger has allowed it to better serve health plans and consumers, some analysts say the pharmacy benefit management operations of Caremark have struggled to persuade customers of its additional value. The company lost nearly $5 billion in contracts with employers and health plans for 2010.

In fact, some critics of the merger say executives are running the combined company to benefit the retail operations of CVS through programs like maintenance choice, a prescription drug benefit plan that offers savings to health plans by limiting where customers can fill prescriptions to CVS stores or Caremark’s mail-order operations.

“One question is whether they are just robbing Peter to pay Paul,” said B. Kemp Dolliver, an analyst with Avondale Partners.

CVS says maintenance choice is valued by its customers because it offers a retail choice beyond programs that mandate prescription delivery by mail.

Given the lackluster performance of the stock, which has treaded water since the merger and closed Thursday at $35.61, some investors have grown restless and are pushing management to reconsider the merger.

“The pressure is currently rising on them,” said Jeffrey Jonas, who follows CVS Caremark for the Gabelli mutual funds, one of the company’s investors.

In late March, Citigroup analysts issued a report that concluded the company would be worth more as separate entities. The Citigroup analysts said any breakup would probably not occur before 2012 because of the tax advantages of waiting until the merger was at least five years old.

“They now have roughly one year to make their case,” said Adam J. Fein, who runs Pembroke Consulting, a Philadelphia firm that follows the industry. He predicted that without a clear sign that customers were beginning to be persuaded that the combination delivered better results, “the clamor to separate the business will be deafening.”

At the same time, CVS Caremark has been accused by consumer advocates of not fulfilling promises made at the time of the merger; executives said then they would erect a firewall between the CVS and Caremark businesses and would be agnostic about where consumers filled their prescriptions.

In their letter, the consumer groups charged the merged company had engaged in unfair practices that favored company-owned pharmacies, including sharing information Caremark obtained in processing prescriptions to help solicit non-CVS customers to fill their prescriptions at CVS drugstores.

The situation is one in which a pharmacy benefit manager, which manages prescription benefits, is “using the information to steer people to their own pharmacies,” said Sharon Anglin Treat, a Democratic legislator in the Maine House of Representatives, who is the executive director of the National Legislative Association on Prescription Drug Prices, a consumer group that signed the letter. “It really does appear that CVS has been unable to avoid a very significant conflict of interest.”

Mark N. Cooper, the director for research at the Consumer Federation of America, one of the groups that signed the letter, said that it was important for the F.T.C. to review the original grounds — including efficiencies, cost savings and consumer benefit — for the merger and determine whether the union had been justified. “The merger was a mistake,” he said.

CVS Caremark says the merger is helping its customers by reducing costs and improving health outcomes. “The innovative products we have introduced into the marketplace since the merger are gaining traction,” Ms. Castel said, and will “enhance shareholder value.”

The company also said it “places a high priority on protecting the privacy of its customers and plan members.” Ms. Castel said CVS Caremark used patient data internally for “appropriate purposes,” like identifying potentially adverse drug reactions.

In addition, some investors say the sharing of patient information is central to any claims by CVS Caremark that the combination of the drugstore chain and pharmacy benefit manager can better serve patients by coordinating information and reducing costs. “What some people are calling antitrust is in the customers’ favor,” Mr. Jonas said.

Article source: http://feeds.nytimes.com/click.phdo?i=739eb4b11a613ed4930c8816e6cdc9c7