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Walgreen to buy 45% stake in Alliance Boots for $6.7b

US-based company will have option to buy remaining 55 per cent in about three years

Gulf News

New York:
 Walgreen Co., the largest US drugstore chain, agreed to pay $6.7 billion for a 45 per cent stake in the UK's Alliance Boots with an option to gain full control in about three years.

Walgreen will pay $4 billion cash and the remainder in stock for its biggest-ever deal, the companies said today in a statement. The stake is being acquired from a group led by KKR & Co. and Alliance Boots Chairman Stefano Pessina, who bought the owner of the UK's largest drugstore chain company in a £12.1 billion (Dh69.68 billion) buyout five years ago.

Combining the businesses would create a global leader with more than 11,000 stores in 12 countries and 370 distribution centres delivering to pharmacies, doctors and hospitals, the companies said. Walgreen will have an "unmatched" global supply chain, Chief Executive Officer Gregory Wasson said on a conference call today. The purchase will help the company get into emerging markets around the world, he said.

"This is potentially one of the most important moves in European retail history,'" said Bryan Roberts, director at Kantar Retail in London. "Walgreens is still a US business so its desire to achieve a more global footprint will be a game- changer. This gets them into Europe and Asia."

The Deerfield, Illinois-based company will have an option to buy the remaining 55 percent of Alliance Boots in about three years. KKR and Pessina will become shareholders in the combined business. Pessina, an Italian billionaire, said on the call he will own an 8 percent stake in Walgreen and doesn't want to take money out.

Debt financing

The transaction "will change the dynamic of the industry," said Pessina, who will join the board of Walgreen along with KKR's Dominic Murphy upon the completion of the initial investment in Alliance Boots.

Wasson said the deal is "a partnership, not a takeover," adding that talks between the companies have been taking place for 18 months. Walgreen will assume Alliance Boots's debt in the second phase of the tie-up, the CEO said.

The deal will lead to cost and revenue benefits across both companies of $100 million to $150 million in the first year and $1 billion by the end of 2016, according to the statement.

Walgreen, which was advised by Goldman Sachs Group Inc. and Lazard, forecast the transaction will add 23 cents to 27 cents a share to diluted earnings per share in the first year after completion of the initial investment, excluding one-time costs. Alliance Boots was advised by Centerview Partners.

KKR stake

The US drugstore owner has lined up $3.5 billion of short-term debt financing from Goldman Sachs and Bank of America Merrill Lynch to help fund the acquisition, according to a statement from KKR. Walgreen plans to replace the bridge facility with permanent financing at a later stage.

Walgreen is paying 8.7 times earnings before interest, taxes, depreciation and amortisation for the stake, according to data compiled by Bloomberg.

KKR, which invested $2.45 billion in Alliance Boots for a 33 percent stake, will get $1.8 billion in cash and 7 million Walgreen shares worth about $200 million, in return for the sale of a 15 percent stake. KKR had $62.3 billion in assets under management as of March 31.

Alliance Boots, based in Nottingham, England, owns more than 3,200 stores globally. The company last month reported a 12 percent increase in annual profit, driven by its wholesale pharmaceuticals business. Pessina said at the time that he was looking for a "transformational" merger as soon as this year to help turn Alliance Boots into a global wholesaler.

The stake purchase is Walgreen's biggest deal, exceeding its $1.08 billion acquisition of U.S. drug-store chain Duane Reade Holdings Inc. from private-equity firm Oak Hill Capital Partners LP in 2010, according to data compiled by Bloomberg. In 2008, CVS Caremark Corp. outbid Walgreen to buy another US chain, Longs Drug Stores Corp.

Loans jump

Alliance Boots loans jumped in London today as Walgreen's option to take full control boosted optimism that lenders will be repaid at par before the final maturity of the loan. The senior loans denominated in pounds were quoted at 96.5 pence on the pound as of 11:30 a.m. in London, up from 92.5 pence yesterday, according to Mizuho Corporate Bank Ltd.

Walgreen completed the purchase of BioScrip Inc.'s community specialty pharmacies and mail-service pharmacy businesses last month in a deal valued at $225 million.

Walgreen shares slipped 16 cents to $31.80 in early trading from yesterday's close of $31.96 in New York. Walgreen shares have declined 3.3 per cent this year as it lost customers to CVS, the largest provider of prescription drugs in the U.S. CVS shares have risen 12 percent this year.

Walgreen had 8,210 locations at the end of fiscal year 2011. The chain, which also sells general merchandise, got 65 per cent of its revenue that year from prescription drug sales.

The initial investment by Walgreen and its option to purchase more of Alliance Boots doesn't include the UK company's minority interest in Galenica AG, the world's largest maker of iron replacement drugs. The investment in the Swiss company will be continue to be owned by Alliance Boots and its existing shareholders, KKR said.