Walgreens puts on its Boots to look for profit overseas

Marc Sidwell
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HAS Walgreens just secured exclusive rights to the elixir of youth? By joining forces with Alliance Boots, the US pharmacist gains the UK high street stalwart’s No7 Protect & Perfect anti-ageing cream, made famous by a BBC Horizon episode in 2007 and a clinical trial supporting its effectiveness in 2009. That’s a handy flourish on this giant deal, since the anti-wrinkle wonder drug is sold in the US today through the Illinois-headquartered chemist’s biggest rival CVS, and discount chain Target.

But Walgreens needs more than moisturiser to keep looking its best. Operating in every American state, the domestically-focused firm relies on pharmacy for 65 per cent of its business. At its height it was filling one in five of every retail prescriptions in America. However, it has just lost one of its most important customers – and risks losing another. Its contract with Express Scripts ended on 1 January 2012, after both parties failed to agree on terms. The contract was worth $5.3bn (£3.3bn) in 2011, responsible for 88m prescriptions out of the 819m Walgreens filled in total, and important too for the additional sales to customers who were visiting the stores for prescriptions. Worse yet, Express Scripts then went on to acquire Medco Health in a $29bn merger. Medco was responsible for 125m prescriptions at Walgreens in 2011, and while Express Scripts has promised to honour existing contracts, the bad blood between the firms is not auspicious for such an important part of Walgreens’s business.

In that light, its sudden overseas ambition seems understandable. While Gregory Wasson, the company’s president and chief executive, was quick to say that domestic growth remained on the agenda, a 45 per cent stake and option to proceed to full combination with Alliance Boots certainly diversifies the firm’s risk. At least in some respects. The ratings agency Standard & Poor’s chose to pour a little cold water on the deal by putting Walgreens’ A long-term credit rating on watch, citing a “meaningful deterioration” of its financial risk profile. That’s due to the debt it will take on to finance the first stage of the deal and the additional debt burden, including assuming the debt of Alliance Boots, that would come with taking over the Swiss-headquartered company in full.

But the risk involved in seeing the deal through still looks compelling. While American investors may worry about solving deteriorating market share at home with exposure to the uncertain fortunes of the Eurozone, the now-dominant position of Boots in the UK is a real prize, accounting for 62.7 per cent of its group’s trading profit, while expansion in areas like Thailand shows the potential for a new global behemoth to brings its combined range of products to growing markets the world over.