Breaking down the WAG-Alliance Boots deal
In June, Walgreens announced a two-step investment in a strategic partnership with Alliance Boots, to acquire a 45% equity stake in the privately held company for $6.7 billion in cash and stock in the first step with the option to acquire the other 55% approximately three years down the road at what is today being projected to be another $9.5 billion price tag in cash and stock.
By 2016, the deal is projected to transform Walgreens from a $72 billion operator, with two-thirds of its revenue coming from its U.S. pharmacy business, to a $130 billion global health-and-wellness player.
There are many factors unique to this deal that helped guide Walgreens toward a two-step transaction, one of the more significant of which is the fact that Stefano Pessina, Alliance Boots’ executive chairman, plans to keep 100% of the shares in Walgreens he receives in both steps for the long term.
Another significant factor: no planned SG&A savings achieved through employee layoffs. “There’ll be no reduction for us because we don’t have any overlap,” explained Wade Miquelon, Walgreens EVP and CFO. “Basically, almost all the savings will initially come from sourcing, and then later top-line revenue,” he said. “As long as we can structure ourselves to get the procurement savings, the two-step process provides us the luxury of time.” That time will allow Walgreens and Alliance Boots over the next 36 months to carefully craft an integration plan for the combined entity. “We are going to spend time to cautiously design a company that is truly global, that is structured for competitive advantage, that has the best players on both sides in the most meaningful roles [and] that maintains an equity and identity that is consistent with what it should be to the relevant stakeholders,” Miquelon said.
In the meantime, the two businesses can realize significant procurement synergies. Walgreens is planning to capture between $100 million and $150 million in first-year synergies. “Combined, we’ll by far buy the most generics in the world,” Miquelon said. “We’ll also be one of the biggest buyers of front-end items [across] branded and nonbranded.”
And with Alliance Boots as one of the largest wholesalers in the world, there are synergies to be realized across logistics, too. “They delivered more than 4.5 billion units to pharmacies, doctors, health centers and hospitals, actually more than any other wholesaler in the world in this industry,” Miquelon said. “Even though we have a very robust infrastructure and distribution system in the [United States], I’m sure they can share ideas about how to make it even more productive.”
One area in which Walgreens will benefit almost immediately is in beauty, particularly in private brand. Alliance Boots has long been acknowledged for its private health and beauty brand development, going all the way back to the launch of its No7 beauty brand in 1935.
Going in the other direction, Miquelon expects that Walgreens will be able to help improve Alliance Boots’ pharmacy systems, as well as help potentially build out a workplace and retail clinic business.