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Walgreen's U.S. Fate Could Be Sealed by Labor Day

NEW YORK (TheStreet) - Expect Walgreen's (WAG) to soon say whether the company will move its headquarters outside the U.S. in an effort cut its corporate tax rate. That expected color comes after a handful of large Walgreen's investors began pressing the company to consider a move to a lower-tax jurisdiction as part of its acquisition of European pharmacy giant Alliance Boots.

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Walgreen's purchased 45% of Alliance Boots from private equity firm KKR in 2012 for $4 billion in cash and $2.7 billion in stock. The company also agreed to an option to buy the rest of Alliance Boots, in coming years, for $9.5 billion.

While Walgreen's didn't chose to use the first leg of the transaction to invert its ownership abroad for tax purposes, the second leg of the transaction is nearing and investors as prominent as Jana Partners are now pressing for such a move.

That has come to a boiling point in recent months, as operating performance at Walgreen's core business in the U.S. has stalled, and management publicly expressed no interest in a move to a lower-tax jurisdiction.

On a fourth quarter earnings call, Walgreen's CEO Gregory D. Wasson said, "[Just] to reiterate, as I said on the last call, we have no plans to do an inversion." In that earnings release, Walgreen's forecast its tax rate to be about 37.5%, while Alliance Boots would be around 20%.

Within weeks, shareholders such as Jana Partners then requested a meeting with management to express their frustration, as the Financial Times first reported.

Jana and other investors at the meeting pitched their views on the merit of an inversion and Walgreen's appears to have taken the message, Crain's Business Chicago noted in a report that speculated Walgreen's management might lose its grip of the company through the Alliance Boots deal.

At a Barclays analyst conference on April 30, Walgreen's management changed its tune on an inversion. Such a tax move is being considered, the company said.

"We're evaluating all of that. We are aware of all of the inversions that are happening and certainly all of that is being investigated in Part II," Walgreen's investor relations head Rick J. Hans said. "We've never been a proponent to pay more taxes than we have to. We try to optimize that. It creates value," he added, while noting that there could be costs and benefits to such a move.

Obvious costs would include increased public scrutiny of a move abroad, possible customer defections and government reaction, especially because the pharmacy benefits operations of Walgreen's are a recipient of Medicare and Medicaid-related drug prescription dollars. Benefits would include a tax rate that could drop as low as 20%, according to tax expert Robert Willens.

A part of Walgreen's changing commentary that hasn't been reported on is how quickly a decision may be made. Hans, the Walgreen's IR executive, said at the Barclays conference investors should expect a decision on the possible inversion by late summer or early fall, when the company files its annual proxy to shareholders.

"[You'll] have that certainly by the time we come over the proxy," Hans said of whether or not Walgreen's will pursue an inversion. "You'd see some details on that," he added, while noting the proxy is slated for late summer or early fall.

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