Shares of Walgreen Co. (WAG: Charts, News), the largest drug retail chain in the United States, were down -1.87 or -5.8% to $30.09 per share on Tuesday, after the company announced it would take a stake in European drug and beauty retailer Alliance-Boots GmbH. The move is intended to expand Walgreens into the international market to create a global network of stores.
The $6.7 billion deal represents a 45 percent stake in Alliance and will be purchased in part from Italian billionaire Stefano Pessina, Alliance-Boots Chairman, and an investor group led by Kohlberg Kravis Roberts & Co. Swiss based Alliance-Boots is one of the largest pharmaceutical retailers in Europe with a presence in over 25 countries.
In addition, Walgreens will have a 3-year option to gain control of the entire company. The combination of the two pharmacy retailing giants will form one of the largest drugstore chains in the world with over 11,600 stores in 12 countries and wholesale operations in 21 countries.
Deerfield, Illinois based Walgreen Co., founded in Chicago in 1901 is the largest drugstore retailing chain in the United States with over 8,300 business locations in all 50 states, Washington DC and Puerto Rico. The company is an S&P 500 component and had net income of $2.7 billion on revenue of more than $72 billion last year.
Alliance-Boots, a privately held concern controlled by Italian billionaire Stefano Passini, is based in Zug, Switzerland and runs the UK’s largest chain of pharmaceutical retailers with over 116,000 employees and 3,300 health and beauty retail stores all over Europe.
The terms of the agreement would have Walgreen buy a 45 percent stake in Alliance-Boots for $4 billion in cash and another $2.7 billion in Walgreen stock. Kohlberg Kravis Roberts will receive $1.8 billion in cash and $200 million in Walgreen stock, KKR originally invested $1.8 billion in Alliance-Boots.
The terms for the three-year option for Walgreen to buy the remaining 55 percent of the company is for Walgreen to pay another $9.5 billion in stock and cash. Walgreen would also assume Alliance-Boots’ outstanding debt, which is currently at approximately $11 billion.
Another important announcement made by Walgreen Co. on Tuesday was that the company had earnings of $537 million or $0.62 per diluted share for the period ended on May 31st, which included a penny per share due to expenses in its transaction with Alliance-Boots. In addition, Walgreen Co. announced it was increasing its quarterly dividend by $0.05 or +22.2% to $0.275 per share payable on September 12th to shareholder of record on August 17th.
Greg Wasson, Walgreen Co. President and CEO stated that, “We are increasing our dividend in line with our commitment to return cash to shareholders and consistent with our previously stated goal of a long-term dividend payout target of 30 to 35 percent of net earnings.”
While the market appears concerned over the Alliance-Boots stake, the European company has solid earnings and is well positioned in the EU’s strongest economies. Walgreen Co. has increased its dividend for the last 37 consecutive years and at Tuesday’s closing price represents a yield of 3.5 percent on Walgreen Co. stock, twice the yield on 10-year U.S. Treasuries of 1.62 percent.
In addition to the outstanding yield with the increased dividend, a real possibility for capital appreciation exists with the larger resulting combined company. Nevertheless, with the Eurozone mired in economic problems, the move might represent a significant opportunity for Walgreen Co. and its investors.
Other News About WAG
Walgreens CEO: Every Intention of Bringing the Two Companies Together
Statements by WAG CEO Greg Wasson on the acquisition of Alliance-Boots.
Alliance Boots Deal Biggest in Walgreen’s History
WSJ article on the Walgreen Co. Alliance Boots deal.
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