Marie Wiere's Blue Sky Management Blog

On June 19, 2012 it was announced that US pharmacy Walgreens, had acquired a 45% share in European pharmacy, health and wellness corporation Alliance Boots, for $6.7 billion. The deal marks Walgreen’s biggest deal ever, which also gives the corporation the option of purchasing the remaining 55% share after 3 years.

I was interested to hear of this acquisition as I am familiar with both companies. Since I moved to the U.S. there has been a Walgreens in many of the areas I have lived in. Similarly, growing up in the UK almost every British high street had a Boots and I remember frequently shopping at this retailer/pharmacy. Alliance Boots, was formed in a 2006 merger of European wholesale and retail pharmacy group Alliance UniChem (founded in 1997) and British high street pharmacist and retailer Boots (founded in 1849).

Walgreen’s acquisition offers the following possible synergies:

Economies of scale: analysts suggest that there will be a perceived $1 billion in cost savings by 2016, if pharmaceuticals are successfully merged.

Gain greater leverage over pharmaceutical companies: by building a larger global chain, Walgreens will acquire greater negotiating leverage over its pharmaceutical and beauty consumer product suppliers. This could potentially enable Walgreens to purchase drugs and other products for lower prices to increase their profit margins.

New product offerings: Boots has numerous strong own brand lines, which have the potential to do well for Walgreens. These lines include Botanics (skin care and make up), Soltan (sun block) and No. 7 (make up). Indeed, several of these lines are currently sold on a limited scale at some CVS and Target stores. Following the acquisition it is expected that these deals will be discontinued as Walgreens seek to exclusively introduce these brands into their stores.

Become a global player: executive chairman of Alliance Boots, Stefano Pessina acknowledges the transformational power of this deal:

“I have always believed that our industry needed a global player and I have really worked for that for the last 10 years, and at the end to have the possibility to really make this dream true, it’s really fantastic for me. I have done many deals in my life, and some transformational deals, at least transformational at the time. I have to say that all the deals I have done are really very small if compared to this deal.”

Once the deal is complete the company will operate over 11,000 drugstores in the U.S., Europe and Asia.

This video further sums up the deal:

Time will tell how successful this deal will be. However, questions are already being asked regarding whether Walgreens paid too much for Alliance Boots and if using some of their shares for the purchase was wise. Reflecting these concerns, on Tuesday the day after the deal was made Walgreen’s stocks fell 5.9% to hit its lowest point since September, 2010. However, Walgreen’s executives appear unsurprised by this:

“We knew that it could be an initial roller coaster ride and a few days for the market to digest. But, we’ve done ample homework and the deal will change the game.”

I think Walgreens is a risk seeker, which I like. Walgreens has had a number of struggles the past year with falling sales and the Express Scripts scenario, so this deal could either be a disastrous distraction or a big success. But what do you think? Share your thoughts in the comments section below.