Walgreens acquires remainder of Alliance Boots

Walgreens has exercised its option to complete the second step of its strategic transaction with Alliance Boots ahead of the original option period, which was between February and August 2015. The transaction, subject to shareholder and various regulatory approvals, would fully combine the two companies to form the first global pharmacy-led, health and well-being enterprise.
This action follows the launch of the companies’ long-term strategic partnership in June 2012, when Walgreens acquired a 45% equity ownership in Alliance Boots, with the option to proceed to a full combination by acquiring the remaining 55% of Alliance Boots in three years’ time (Step 2). Walgreens expects to close the transaction in the first quarter of calendar 2015.
Walgreens also announced the following decisions related to moving forward with Step 2:
A new holding company to be formed in connection with the transaction will be named Walgreens Boots Alliance, and will include four divisions: Walgreen Co. (the largest drug store chain in the United States); Boots (the U.K. and Republic of Ireland’s leading pharmacy-led health and beauty retailer); Pharmaceutical Wholesale and International Retail (including Alliance Healthcare, Europe’s largest pharmaceutical wholesaler); and Global Brands. In addition, the combined company is establishing a cross-divisional global pharmacy market access group;
Upon closing, the combined enterprise will blend senior management from both companies, including Walgreens president, CEO and board member Greg Wasson who will be president and CEO of Walgreens Boots Alliance, and Stefano Pessina, executive chairman of Alliance Boots, who will be executive vice chairman of the combined company responsible for strategy and M&A reporting to Wasson, and chairman of a new strategy committee of the board of directors;
Jim Skinner will serve as the non-executive chairman of the board of directors for the combined company;
The Walgreens Boots Alliance holding company will be headquartered in the Chicago area, while Walgreens operations will remain headquartered in Deerfield, Ill. Boots operations also will remain headquartered at its current location in Nottingham, U.K.;
The company is outlining a new three-year “Next Chapter” plan through fiscal 2017 that sets strategic goals for the combined company. The plan reflects significant value-creating opportunities for the combined enterprise to drive long-term shareholder value;
In conjunction with its strategic plan, the company is establishing a new adjusted earnings per share goal for fiscal 2016 of $4.25 to $4.60;
The adjusted EPS goal includes accelerated cost reduction initiatives that target $1 billion in savings by the end of fiscal 2017 to establish an efficient global enterprise; and
Walgreens board of directors also 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.

Walgreens Boots Alliance combines two leading companies with iconic brands, complementary geographic footprints, shared values and a heritage of trusted healthcare services through pharmaceutical wholesaling and community pharmacy care, dating back more than 100 years each. Combining the companies will create a pharmacy-led health and well-being retailer with more than 11,000 stores in 10 countries and a portfolio of retail and business brands, as well as increasingly global health and beauty product brands. The full combination also will establish 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 countries, according to Walgreens. Walgreens Boots Alliance also will be the world’s largest purchaser of prescription drugs and many other health and well-being products.
“We are excited to move forward with the next important step in becoming a new kind of global healthcare leader,” Wasson said. “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 2. 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 expected creation of the new enterprise will represent the most significant milestone in the history of Alliance Boots and, importantly, a very positive step for the healthcare industry as a whole," Pessina said. "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. 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.”
Under the terms of the revised agreement, the period during which Walgreens is permitted to exercise its option to acquire the remaining 55% of Alliance Boots that it does not currently own, in exchange for £3,133 million in cash (equivalent to approximately $5.29 billion at a current $1.69=£1 exchange rate) payable in British pounds sterling, and approximately 144.3 million shares of common stock of Walgreens, has been accelerated to begin on Aug. 5, 2014, and end on Feb. 5, 2015. Pursuant to the agreement, Walgreens exercised the option through an affiliate on Aug. 5.
Leading Walgreens Boots Alliance will be a top management team led by Wasson and consisting of senior executives from both companies. In addition to Wasson’s and Pessina’s roles, the following appointments are being announced:
Ornella Barra, chief executive wholesale and brands of Alliance Boots, will become EVP of Walgreens Boots Alliance and president and chief executive of global wholesale and international retail;
Jeff Berkowitz, president of Walgreens Boots Alliance Development, will serve as EVP 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 EVP Walgreens Boots Alliance and president of Walgreens;
Tim McLevish, previously announced as Walgreens EVP and CFO, will serve in that role in a global capacity for Walgreens Boots Alliance;
Ken Murphy, managing director of Health & Beauty International and Brands of Alliance Boots, will serve as EVP of Walgreens Boots Alliance and president of global brands;
Simon Roberts, managing director of Health & Beauty, UK and the Republic of Ireland of Alliance Boots, will serve as EVP Walgreens Boots Alliance and president of Boots;
Tom Sabatino, Walgreens chief administrative officer and general counsel, will serve as EVP 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 EVP and global chief information officer of Walgreens Boots Alliance; and
Kathleen Wilson-Thompson, Walgreens chief human resources officer, will become EVP and global chief human resources officer of Walgreens Boots Alliance.

The fully combined Walgreens Boots Alliance global enterprise will be domiciled in the United States and headquartered in the Chicago area. Walgreens operations will remain headquartered in Deerfield, Ill., and Boots operations will remain headquartered at its current location in Nottingham, U.K.
In connection with moving forward with the option exercise, and given the potentially significant business, financial, legal and competitive implications, Walgreens management and the board of directors thoroughly evaluated the possibility of combining Walgreens and Alliance Boots under a foreign parent company in an “inversion” transaction.  The original option transaction would not qualify for an inversion under the current tax inversion rules. The company and board of directors, including a special committee of independent directors, and with the benefit of leading advisors in the fields of tax policy and inversions, undertook an extensive analysis to explore the feasibility of a restructured inversion transaction that would provide the company with the customary level of confidence needed to withstand IRS review and scrutiny. As part of this process, the company considered a wide range of issues, including the potential financial benefits (and their sustainability) and the technical viability of a restructured inversion transaction under current U.S. law. The company 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.
"It was not in the best long-term interest of our shareholders to attempt to re-domicile outside the United States.”
“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,” said Wasson. “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 re-domicile outside the United States. The board did, however, believe accelerating the option to exercise Step 2 was in the best interest of our shareholders, and with this decision, we are now moving forward on an accelerated basis to create the global leader in pharmacy-led health and well-being.”
With the full combination, Walgreens Boots Alliance will be positioned for a new era of profitable growth and is aggressively pursuing future opportunities to drive sustainable shareholder value over the long term. To do so, the company is launching a new three-year “Next Chapter” plan that will maximize the scope and scale of the new combined company. Through the plan, core business performance will be accelerated by providing:

  •     A differentiated retail experience that transforms the retail model for health and wellness and changes the way women shop for beauty;
  •     Integrated pharmacy and health care that advance the role of pharmacists and provide access to innovative healthcare services; and
  •     Global pharmaceutical services that reinvent the pharmaceutical value chain and deliver a seamless specialty pharmacy model.

With the plan, the combined company is establishing goals for fiscal 2016, including revenue of between $126 billion and $130 billion and adjusted earnings per share of $4.25 to $4.60. In addition, the combined company anticipates exceeding the previously established $1 billion synergy goal.
The company’s continuing focus on improving core performance in the near-term at both Walgreens and Alliance Boots also remains a critical component of the “Next Chapter” plan. “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,” said Wasson. “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.”
As part of the combined company’s goal to establish an efficient global platform, the management team is accelerating a multi-faceted, cost-reduction initiative across the enterprise. The $1 billion, three-year plan includes corporate, field and store-level cost reductions.  The company is making significant progress in an effort that is already under way in order to begin realizing incremental benefits in fiscal 2015. Additional details will be provided in coming quarters as the company recognizes certain costs associated with these initiatives.  These cost savings are additive to the synergies discussed above.
“Walgreens has demonstrated a strong focus on cost control as adjusted SG&A growth has slowed significantly from historical trends,” said Wasson. “We have made this impact by driving efficiencies across the enterprise, and we are continuing to focus on that. Earlier this year, we announced enterprise optimization initiatives to further accelerate these efforts, which we’ve executed this fiscal year through strategic closures of certain distribution centers and stores, exiting certain businesses and driving cost reduction programs at our headquarters and in the field. We also plan to expand these efforts as we leverage the expertise of both companies and move forward integrating Walgreens and Alliance Boots.”
The board of directors has approved a new capital allocation policy for the combined enterprise. The policy is designed to ensure a balanced and disciplined approach to capital intended to drive business growth and generate strong returns, while returning cash to shareholders through dividends and share repurchases over the long term. The key elements of the new capital allocation policy include:

  •     Investing across core businesses at suitable returns to drive organic growth;
  •     Pursuing strategic opportunities, including mergers and acquisitions, that are consistent with the company’s strategy, meet its return requirements, are accretive and drive long-term growth;
  •     Maintaining a strong balance sheet and financial flexibility with a commitment to solid investment grade credit ratings to govern future capital allocation; and
  •     Returning cash to shareholders by targeting a 30% to 35% percent long-term dividend payout ratio and a new $3 billion share repurchase authorization through the end of fiscal 2016.

In addition, the board of directors of Walgreens on Aug. 5, 2014, increased the quarterly dividend to 33.75 cents per share, a 7.1% increase over the year-ago quarterly dividend of 31.5 cents per share. The increased dividend is payable Sept. 12, 2014, to shareholders of record Aug. 21, 2014, and raises the annual rate from $1.26 per share to $1.35 per share. This marks the 39th consecutive year Walgreens has raised its dividend.
“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,” said Wasson. “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 financial advisors in connection with the second step of the Alliance Boots transaction are Goldman, Sachs & Co. and Lazard, and its legal advisors are Wachtell, Lipton, Rosen & Katz, and Allen Overy.



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