The risks are big for Walgreens, as people question how big its earnings drop will be in the U.S. and whether pushing into European healthcare, which is funded by cash strapped governments, is mistimed.
The company will pay $6.7 billion in cash and stock for the 45% stake in Alliance Boots and will have the option to buy a remaining 55% stake for $9.5 billion. That prospective $16.2 billion takeover valuation also comes with roughly $11 billion in Alliance Boots debt after its 2007 private equity buyout.
But after the deal, expectations of zero growth at Walgreens may be too low. "[Walgreens] is currently priced for moderately lower EBITDA margins 6.9% with 0% top line growth over the longer term. These growth expectations appear low," wrote Credit Suisse analyst Bhumika Gashti, in a note that highlights Alliance Boots higher than industry average earnings and margins.
Gashti says that at current share prices, Walgreen's risk and reward "appears compelling." The deal will hinge on whether Walgreens can achieve single digit profit growth at Alliance Boots, the analysts noted.In Thursday afternoon trading, Walgreens rose slightly to $29.27, pushing shares slightly off 52-week lows. Year-to date, the company's shares are off over 11%, underperforming double-digit stock gains by competitors Express Scripts and CVS. In fearful time for capital investment, investors who want to put their money behind corporate risk takers may do well to take note of recent moves by Warren Buffett and activist investor Jeffrey Ubben. Despite calls by investors like Whitney Tilson for Buffett to increase share buybacks at Berkshire Hathaway (BRK.A), the "Oracle of Omaha" recently indicated that he's drawn his elephant M&A guns in search of a $20 billion deal. Meanwhile, Ubben of ValueAct Capital recently told TheStreet that he's investing in turnaround and growth efforts at companies like Adobe (ADBE) and Valeant Pharmaceuticals (VRX), which hinge on M&A. "We're always fighting the last war in this age of austerity. The problem is that like people don't trust the government, they don't trust their companies," said Ubben in May. A continued M&A lull and investor reactions to recent large-deals by Walgreens and Bed Bath & Beyond signals continued skepticism of C-suite aggression. However, investors with a contrarian bent may want to consider that the deals could eventually pay off. Investors can also choose to invest in other M&A models. Starbucks (SBUX) chief executive Howard Schultz is jazzed up about a strategy to attach big investments and expectations to relatively small sized acquisitions, mirroring IBM's (IBM) growth plan. -- Written by Antoine Gara in New York.
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