Walgreens Tumbles on Costly Global Deal (Update 1)
Updated to include CEO comments and additional analyst reactions.
NEW YORK (TheStreet) -- Amid a contract standoff with competitor Express Scripts(ESRX) and sales losses to CVS Caremark(CVS) , Walgreens(WAG) , the largest drugstore chain in the U.S., is hitting back after taking a 45% stake in European pharmacy giant Alliance Boots for $6.7 billion, in a cash and stock deal.
For Walgreens, the deal could transform the company into an international pharmacy powerhouse with a top presence in the U.S. and Europe, while giving it a growth and M&A strategy that differs from competitors Express Scripts and CVS Caremark who have scaled their U.S. presence through large deals in recent years.
However, analyst reactions and Walgreens tumbling shares signal that the company has to prove now is the time to invest in an international and European growth push, and that it can offset prospective market share losses in the fast-consolidating U.S. pharmacy industry.
With Alliance Boots, Walgreens will become one of the world's top drug store and pharmacies with over 11,000 stores in 12 countries, primarily in North America and Europe. For both companies, the deal fills a big strategic need; however, it comes at a big cost.
Walgreens will pay $4 billion in cash and $2.7 billion in its stock for a 45% stake in Alliance Boots and will have the option to buy a remaining 55% stake in Alliance Boots for $9.5 billion in coming years. That prospective $16.2 billion takeover valuation also comes with roughly $11 billion in Alliance Boots debt after its 2007 private equity buyout led by private equity giant KKR(KKR) .
Already, Walgreens has lined up $3.5 billion in bridge financing from Goldman Sachs and Bank of America Merrill Lynch to pay for the first leg of the deal.
Faced with a standoff on a $5 billion drug prescriptions contract with Express Scripts, and key customer losses to CVS Caremark, Tuesday's stake acquisition gives Walgreens a growth plan to counter quarterly sales losses. Meanwhile, Alliance Boots has found an entry into the U.S. after its chairman and part owner Stefano Pessina said that he would look for a "transformational" deal to turn the company from a European powerhouse into an international player.
The question is whether the timing of Walgreens bold international push and the strategy can add to the company's earnings, which may be hit by its Express Scripts standoff and customer losses.