In an environment where companies are trying their best to survive as well as grow, U.S. drug retailer Walgreens (WAG, Financial) is expanding into new markets by acquiring Alliance-Boots GmbH. This news had not gone down well with Walgreen investors who shunned the stock.
A buyout is always considered an opportunity to invest in the company which is expected to benefit largely with the new business. But this is not the case with Walgreens since this acquisition is targeted to enter the European market, which doesn’t look like a very good idea to investors.
But if it was so, then the Illinois-based company wouldn’t have put its money on Alliance. Instead, it would have undertaken a share buyback program. But it didn’t undertake such a measure to boost the share price and decided to take the negative reaction on the chin. But why? Let’s see.
Alliance-Boots is a European drug and beauty retailer and has a strong position in Europe with solid earnings. It has grown strongly over the years since coming into existence in 2006. This growth potential of the company is expected to create great financial value for the acquirer with additional earnings of 23 to 27 cents a share in the first year itself. Also, the combined entity will save costs up to $150 million in the first year. This is the reason why Walgreen opted to spend its cash on Boots and face the ire of investors, since the acquisition is expected to create value in the long run.
The deal
The $6.7 billion deal will bring cross benefits to both the companies. On one hand, with 45% stake in Alliance it will give Walgreens exposure to international market helping it create a network of stores globally. And on the other hand, the deal allows Alliance Boots to enter the U.S. market, which it was eyeing for from the past 10 years. The combined entity is supposed to be one of the biggest drugstore business with around 11,600 stores across 12 countries with more than 170,000 pharmacies, hospitals and health centers.
The transaction will also help the U.S. drugstore chain increase volumes since it has been losing a lot of it because of non-renewal of contract with Express Scripts Holdings (ESRX, Financial), a company which manages prescription drug benefits for employers and other clients. Walgreens used to fill prescriptions for members of Express but from January 2012 the contract is no longer with the drugstore chain. This has had an adverse effect on the recent quarter also. Let’s take a bird's eye view of the performance.
Conclusion
Though Walgreens’ decision to enter the European market at the time of the euro crisis is a bold one, it has the potential to do wonders when the economy recovers a little. Moreover, with so many benefits at the forefront, this looks like a good bet for the company. Also investors are expected to reap profits since it has a great track record of paying out dividends which is affirmed by the dividends announced recently, that, too, in the wake of losing Express Scripts. A company that keeps investors happy even in the difficult times is surely a good pick for your portfolio.
