Walgreen Wants a Taste of Europe
Himanshu is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In an environment where every company is trying its best to survive as well as grow, U. S. drug retailer Walgreen (NYSE: WAG) is trying to expand into new markets by acquiring Alliance-Boots GmbH. This news has not gone down well with Walgreen investors who shunned the move, sending the stock downwards.
A buyout is always considered as an opportunity to invest in the company which is expected to benefit largely with the new business. But this is not the case with Walgreen 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?
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 Begets…
The $6.7 billion deal will bring cross benefits to both companies. On one hand, with a 45% stake in Alliance, Walgreen will gain exposure to an 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 eying for the past 10 years. The combined entity is supposed to be one of the biggest drugstore businesses with around 11,600 stores across 12 countries with more than 170,000 pharmacies, hospitals and health centres.
The transaction will also help the U.S. drugstore chain increase volumes since it has been losing a lot of it because of the non-renewal of a contract with Express Scripts Holdings (NASDAQ: ESRX), a company which manages prescription drug benefits for employers and other clients. Walgreen used to fill prescriptions for members of Express, but from January 2012 the contract is no longer with the drugstore chain.
The loss of Express Scripts has been a sore point for Walgreen. The customers that it has lost along with the contract have been filling the coffers of rivals Rite Aid (NYSE: RAD) and CVS Caremark (NYSE: CVS). Walgreen’s divorce with Express has helped the distraught Rite Aid, which has been in the red for a whopping 20 quarters on the trot and is deep down in debt, see some better days. On the other hand, CVS Caremark has gotten stronger and recently hit its 52-week high. It grew its earnings by an impressive 20% in its recently reported quarter and looks good for more.
A Bird’s Eye View of the Quarter
Revenue for the third quarter dropped 3.4% to $17.8 billion and earnings fell 11% to $537 million. The company witnessed a decrease of 8.4% in prescriptions filled in the quarter. Walgreen’s stores experienced low consumer traffic as people switched to rival stores, hurting the drug retailer’s sales. But the positive aspect of the quarter was the announcement of an increase in dividends. The company increased its quarterly dividend to 27.5 cents a share, an increase of 22%.
Though Walgreen’s decision of entering the European market at the time of 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 fore front, 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 dividend announced recently, that too in the wake of the loss of Express Scripts. A company which keeps investors happy even in difficult times is surely a good pick for your portfolio.
justhimanshu has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Express Scripts. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.