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[9 comments]

Walgreens' HQ to stay put in U.S.

August 6, 2014

Walgreens announced today that it has exercised its option to buy the remaining 55 percent of Alliance Boots that it did not already control and the combined company will base its headquarters somewhere in the Chicago area. The parties expect the deal to close in the first quarter of 2015.

A new holding company, Walgreens Boots Alliance, will be formed to manage the enterprise that will include four divisions:

  1. Walgreens - the top drugstore chain in the U.S.
  2. Boots - the leading drugstore chain in the U.K. and Ireland
  3. Pharmaceutical Wholesale and International Retail - includes Alliance Healthcare, the largest pharmaceutical wholesaler in Europe
  4. Global Brands

Walgreens president and CEO Greg Wasson will become president and CEO of Walgreens Boots Alliance. Stefano Pessina, executive chairman of Alliance Boots, will become executive vice chairman of the new company responsible for strategy and M&A activity. He will also become chairman of a new strategy committee for the Walgreens Boots Alliance board. Jim Skinner, retired CEO of McDonald's, will serve as the company's non-executive chair.

The Walgreens and Boots deal creates a drugstore giant operating more than 11,000 stores in 10 countries. It also becomes the largest pharmaceutical wholesaler and distribution network with more than 370 distribution centers making deliveries in 20 countries. According to a press release to announce the deal, "The combined size, scale and expertise will help Walgreens and Alliance Boots expand the supply, and address the rising cost, of prescription drugs in America and worldwide."

Prior to the deal being announced, there was a great deal of speculation on whether Walgreens would move its headquarters outside of the U.S. to reduce its tax liability. In the end, the company decided a so-called inversion transaction was not in the best interest of 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 Mr. Wasson in a statement. "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 U.S."

Moving ahead, Walgreens Boots Alliance has established a three-year "Next Chapter" plan to take advantage of the scale of the new company. This includes:

  • Delivering a differentiated model for health and wellness, and a focus on changing the way women shop for beauty products;
  • Integrating pharmacy and health care to advance the role of pharmacists as healthcare providers;
  • Reinventing the pharmaceutical value chain.

"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," said Mr. Wasson. "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."

FINANCIALS:     [NYSE:WAG] [ ]

Discussion Questions:

What are your expectations for Walgreens Boots Alliance going forward? Will the combined company be able to successfully address the rising cost of prescription drugs as suggested in its press release? Will keeping Walgreens Boots Alliance's headquarters in the Chicago area benefit the company in the U.S. market?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How likely is it that Walgreens Boots Alliance will be able to successfully address the rising cost of prescription drugs?

Comments:

Leaving the HQ in Chicago may not produce a tangible benefit in the U.S. because consumers will see no change. Moving the HQ out of the U.S. would generate a lot of negative publicity which could harm the messages and imaging that will be taking place.

The size of the new company may create a condition for strong negotiations on the price of prescription drugs. However, the use of technology to create efficiencies and new programs to attract consumers will also create a strong negotiating position. I expect to see some creative consumer health experience initiatives coming from the new company.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

The decision to remain domiciled in the U.S. avoids what was expected to be particularly nasty backlash from the U.S. government, but more importantly, it should pacify U.S. consumers who have more and more options to fulfill their drug store needs, and require little impetus to shift loyalties. Walgreens already faces stiff competition from the likes of CVS, supermarkets and online retailers. But the battle for market share is bound to intensify as the seemingly ubiquitous dollar stores bolster their health and beauty offerings and Walmart and Target ramp up small-box expansion, which is sure to include a pharmacy offer.

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Kelly Tackett, Research Director, Planet Retail

The devil is in the execution. The history of retail is replete with examples of otherwise successful operations that began to flounder when they were acquired by somebody headquartered outside their trading area.

So, the best answer is, "We'll see."

As to whether or nor the combined entity can influence pricing—again, we'll see. They certainly are in a potential position to wield undue influence, but they are hardly the only game in town.

As to the last question, it may help a bit in terms of PR with the federal government, but I don't think customers would be that impacted either way.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

On the surface, it would appear foolish not to take advantage of the lower tax rates offered by moving the HQ out of the U.S. However, it is important to note that Walgreens does substantial business directly or indirectly with the U.S. government. That could become an issue if they become a foreign company.

The pharmacy business in most countries is quite fragmented among small competitors. Walgreens Boots have a major opportunity to roll up or overpower the existing networks and build a worldwide business. The issue will be adapting the basic business model to the many unique cultures and situations.

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Raymond D. Jones, Managing Director, Dechert-Hampe & Co.

With regard to inversion, this is a political issue and a PR issue. It is not really a tax issue. Most of the large U.S. companies do not pay the nominal tax rate. The net corporate taxes paid by the top 100 U.S. companies runs from 17 percent to 21 percent. The biggest reason for re-incorporating outside the U.S. is for growth. The markets outside the U.S. provide the only opportunity and the laws are more favorable to cross-border transactions.

Walgreens' growth will come from two sources; 1.) Their "Next Chapter" strategy, and 2.) Using Boots as a base expansion into the 92 percent of the world where economic growth is taking place. Notably and impressively, "Next Chapter" does not include more stores in the U.S. The only place they are going to get U.S. growth is in developing different businesses using their U.S. stores as a base and increasing their return on assets.

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Gene Detroyer, Professor, Independent

I'm heartened that Walgreens elected to remain in Illinois; the average American feels a little bit like a chump for paying taxes, when the truly wealthy pay far lower rates, and so-called "inversions" make news.

Rising prescription prices are a real problem for the industry. One suggestion: lobby Congress (good luck with that) to ban commercial advertising of prescriptions. Every time we hear "ask your doctor about Celebrex" we're paying the freight.

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Cathy Hotka, Principal, Cathy Hotka & Associates

Keeping the new corporate headquarters in the U.S. is meaningful. It will show no difference to the U.S. consumer; but the negative publicity, if they were to move, could be a marketing nightmare. Maybe this could be the beginning of a huge consortium that will be able to pressure the drug companies to lower the cost of many of the drugs we have to take as we age.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Walgreens' main concern is Walmart, so, this draws them to a more parallel place in terms of the global market IMO. Walgreens also "gets" the fact that store environment means something to the customer, as does Boots, which is a non-factor for their chief rivals in the box category and thus a big plus for them. I mean, if you're a warehouse, you're directly in the sights of Amazon, which is a much easier warehouse to deal with.

As an aside from that, not sure any retailer is going to be able to affect big pharma costs. I'd let the internet and the consumer's new found global purchasing power take care of that. Only competition will move that big needle.

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Lee Peterson, EVP Creative Services, WD Partners

Good PR move to stay in the US. The announcement copy surely indicates, however, that Walgreens' top priority, as it is for almost all major retailers, is their shareholders and not consumers. It's all about the money, regular platitudes such as "Our focus is on our guests" aside.

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Al McClain, CEO, Founder, RetailWire.com

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