Walgreens steps into new regions with Boots
LONDON BRIEFING:ONE OF them can trace its roots back to 1849, when agricultural worker John Boot moved to Nottingham to open a small shop selling herbal remedies; the other began in 1901, when Charles R Walgreen bought his own pharmacy store in Chicago.
Boots the Chemist grew to become one of the best-known names on the British high street, while in the US Walgreens and its sister chain Duane Reade enjoy similar status on Main Street.
The combination of the largest pharmacy business in Europe with America’s biggest drugstore chain, announced yesterday, will create a global pharmacy powerhouse, trading from more than 11,000 stores throughout 12 countries.
Although it has been billed by both companies as a “partnership”, the surprise deal is a takeover of the European business by the American company, initially with Walgreens taking a 45 per cent stake in Alliance Boots, parent company of Boots the Chemist, for $6.7 billion (€5.30 billion) in cash and shares.
It has the option to buy the rest in 2015 on terms that value Alliance Boots at just over $16 billion.
For the US company, the move is a real departure – it has no overseas operations and this is its biggest ever deal.
Alliance Boots, on the other hand, has been created via a series of mergers and acquisitions, overseen in recent years by its billionaire executive chairman and major shareholder, Stefano Pessina, who is in his 70s.
It was Pessina who oversaw the takeover of Alliance Boots in 2007, just before the financial world went into meltdown, joining forces with private equity giant KKR to pull off the purchase – and also investing more than £1 billion (€1.24 billion) of his personal fortune in the takeover.
At £12.4 billion, it remains one of the largest-ever private equity deals.
In 2006, he had played a key role in the merger of Boots with Alliance Unichem.
One of the main attractions for Walgreens is the geographical reach that Alliance Boots will bring.
Alliance Boots has 3,300 pharmacies, operating in 11 countries, and a large pharmaceutical wholesaling operation. Its turnover last year was £23 billion.
Walgreens, headquartered in Illinois, has almost 8,000 drugstores and fills one in five retail prescriptions in the United States. Sales last year totalled $72 billion.
By 2016, the two companies say they expect combined sales to reach in the region of $130 billion.
There will be significant synergies as a result of the deal, as the business leverages its status as the world’s largest buyer of prescription medicines. Savings are put at between $100 million and $150 million in year one, reaching $1 billion in the fourth year.
Synergies normally mean redundancies, but the good news for Walgreens’s 247,000 employees and for Alliance Boots’ 116,000-strong workforce is that no job losses are expected, as both companies operate in different parts of the world and will continue to trade under their own names in existing markets.
There will be some product integration; for example, Boots’s popular No7 brand will start to be seen in Walgreens and Duane Reade stores.
For Alliance Boots, the deal brings it into the huge American market, a long-time graveyard for British retailers that have tried to make it across the Atlantic on their own.
For KKR, it’s an opportunity to cash in a large slice of its stake in Alliance Boots at a very healthy return, while also retaining a stake in the enlarged business.
Both companies yesterday stressed their similar backgrounds, shared heritage and similar values. Nonetheless, putting the two together will be a considerable undertaking, which is why it probably makes sense to have a three-year run-up to the Americans taking full control.
Board positions will be shared from the outset, with Pessino and a KKR representative joining the Walgreens board and Walgreens’s chief executive Gregory Wasson becoming a director of Alliance Boots.
Boots the Chemist holds a special place in British retail history but yesterday’s deal is, in fact, the second time that the company has attracted the attention of the Americans.
In 1920, Jesse Boot (son of founder John Boot) sold the business to United Drug Company, one of the largest pharmaceutical firms in the US, for £2.25 million.
The business enjoyed more than a decade of growth as a subsidiary of a US company but British ownership was restored in 1933 when the Great Depression forced the Americans to sell the company, for £6 million, to a group of British financiers led by Jesse’s son, John Boot.
Fiona Walsh writes for the Guardian newspaper in London