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Walgreens Tumbles on Costly Global Deal (Update 1)

The deal has benefits, such as creating new growth opportunities for Walgreens and its shareholders. "We applaud Walgreen management for no longer sitting on its hands from a strategic perspective given the ongoing Express Scripts impasse," wrote UBS analyst Jason DeRise in a Tuesday note to clients.

"Our sense is that investors will now begin to refocus on Walgreen as more of a growth investment opportunity as opposed to trading opportunity around a potential resolution (or lack thereof) to the ESRX dispute."

Separately, Walgreens reported fiscal third quarter earnings per share of 62 cents, meeting street estimates; however, a sales fell 3.4% year-over-year to $17.8 billion, slightly missing estimates. Last month, Nottingham, England -based Alliance Boots reported a 12% increase in annual profit, on growth at its wholesale pharmaceuticals business

In a sense, the deal marks a second attempt to buy Alliance Boots and turn a profit. In 2007, KKR and Alliance Boots Chairman Stefano Pessina took the company private in $12 billion pound buyout that was the largest private equity deal at the time. Since then, KKR says that Alliance Boots profits have surged 88%.

As part of 45% stake acquisition by Walgreen, KKR will receive $2 billion in cash and stock for roughly half of its Alliance Boots stake after it made a $2.45 billion investment in 2007. The private equity giant will also gain a seat on Walgreen's board.

"We are looking forward to working with Alliance Boots to leverage our combined strengths and provide an even broader range of innovative, cost-effective products and services to patients and customers across the healthcare landscape," said Walgreens chief executive Gregory Wasson, of Tuesday's stake acquisition.

"Together we will be ideally positioned to expand our customer offerings in our existing markets and become the health and wellbeing partner of choice in emerging markets."

That strategy counters other long-speculated options for Walgreens, including a takeover of debt-laden pharmacy and drug store giant Rite Aid (RAD - Get Report).

In November, Susquehanna Financial Group analyst Joseph Stauff wrote in a note to clients that Rite Aid could be a target of Walgreen, the largest U.S. drugstore chain. With Rite Aid, Walgreen would further bolster its near 30% market share, distancing it from CVS Caremark (CVS - Get Report), the industry second, noted Stauff.

In March, Credit Suisse analyst Edward Kelly said that a Rite Aid acquisition would help Walgreen push against drugstore competition by pharmacy benefits managers like CVS Caremark and Express Scripts, which completed a $29 billion 2011 acquisition of Medco Health Solutions (MHS).

Tuesday's deal counters those expectations and Walgreens previous M&A history, as it shifts its strategy internationally. In 2010, Walgreen spent $1.1 billion to buy New York-based drug-store chain Duane Reade from private equity firm Oak Hill Capital and was a bidder for Longs Drug Stores, another U.S. chain that was eventually bought by CVS Caremark.

For more on investing in drug stores and pharmacy giants see why Rite Aid's earnings overtake deal hopes and why Express Scripts could be sandbagging synergies.

-- Written by Antoine Gara in New York
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