Following months of controversy and internal turmoil, Walgreen Co. completed its takeover of Alliance Boots on December 31, 2014 following a shareholder vote to authorize a share issuance to fund the deal on December 29th. Walgreens also completed a corporate reorganization, creating a Delaware-based holding company called Walgreens Boots Alliance that trades on the NASDAQ. While the two-and-a-half-year transaction is complete, many questions remain about the strategy and growth plan of this new global company.
When Walgreens announced in August its plan to acquire the 55 percent of Alliance Boots it did not already own, management also lowered its 2016 financial guidance dramatically. The company now predicts that operating income for the combined company will be 22 percent lower than promised at the outset of the Alliance Boots partnership.
The company’s top leadership has also changed radically since the deal was made public, with longtime Walgreens executives exiting and Alliance Boots leaders taking key roles. In the past six months, executives including CEO Greg Wasson, CFO Wade Miquelon and pharmacy chief Kermit Crawford have all left the company. While Wall Street applauded the exit of CEO Wasson, the future of the company is now more uncertain, with a permanent CEO yet to be identified.
“We’re less convinced of the sustainable competitive advantage [the deal] creates, particularly in the U.S.,”
Robert M. Willoughby, Bank of America
Analysts’ reaction to the Alliance Boots deal and Walgreens’ current growth strategy has been mixed. At least three analysts have downgraded the stock since August, and it has been met with skepticism by others:
Ann Hynes of Mizuho, who downgraded Walgreen to “neutral” weeks before the vote, noted that the company’s objectives “will be difficult to achieve” because of integration risks due to management changes, exposure to stagnant international markets and sub-par organic for both Walgreen and Alliance Boots.
Bank of America’s Robert M. Willoughby said that the merger is characterized by a sizable debt load, slow profit growth and a purchasing synergy “that may not be sustainable.” Willoughby also noted he was “less convinced of the sustainable competitive advantage [the deal] creates,” especially in the United States.
Edward Kelly at Credit Suisse noted that “we have concerns about the company closing the margin gap to CVS, believe a front-end improvement will be difficult and take time, and see structural challenges longer-term in the standalone pharmacy business.”
As the company moves forward into uncharted waters, Walgreen Strategy Watch will continue to examine the fallout from the Alliance Boots transaction, along with the company’s new management structure and the intensified cost-cutting program currently underway.