LONDON (The Deal) -- Healthcare products retailer Walgreen (WAG) said on Wednesday it is striking out early to reel in the outstanding 55% of European peer Alliance Boots with an agreement with co-investors including Kohlberg Kravis Roberts & Co. that is worth about $18.5 billion in cash, stock and assumed debt
The buyout will fully unite the market leader in the U.S. with the No. 1 in the U.K. and the Republic of Ireland and Europe's leading pharmaceuticals wholesaler and the owner of attractive consumer brands including No. 7 cosmetics and the Soltan sun protection range.
The companies will be merged under a new Chicago area-based holding company, Walgreens Boots Alliance Inc. Walgreen boss Greg Wasson will be president and CEO of that entity, while Alliance Boots Chairman and co-owner Stefano Pessina will move to the enlarged company as vice chairman, responsible for strategy and M&A. Walgreens Boots Alliance will have about 11,000 stores in 10 countries.
The terms of the agreement were arranged with Walgreen's original, June 2012 investment in the European company but a rise in the Deerfield, Ill.-based company's share price has lifted the price. As agreed in June 2012, Walgreen will pay just over $5.29 billion in cash, and issue about 144.3 million shares to the selling shareholders.
That stock is worth about $4.7 billion, based on Walgreen's $69.12 closing price on Tuesday; whereas the June 2012 deal had stipulated a minimum Walgreen price of $31.18 a share and envisaged a total value of $9.5 billion for phase two of the deal. Walgreen paid $6.7 billion in cash and stock for its initial 45% stake. With the second stake purchase, it will also assume Alliance Boot's debt, which was about $8.5 billion as of March 31.
The June 2012 agreement gave Walgreen the option to buy the rest of the company between February and August next year but the parties agreed to bring it forward. Significantly also, Walgreen has ditched reported plans to use the buyout to switch its tax domicile to Europe amid a domestic outcry about so-called inversions and a pending clampdown on the practice. Alliance Boots has itself drawn criticism for its Swiss domicile.
Inversions are a growing trend where U.S companies merge with foreign rivals in countries with lower tax rates and reincorporate there but still do the majority of their business in the U.S.
The decision by Walgreen to cancel consideration of plans to switch domiciles comes after the Treasury Department is reportedly examining a broad range of authorities for administrative actions that could limit the ability of companies to engage in inversions, as well as moves that could decrease the tax benefit of conducting an inversion. A Treasury official did not return calls.
It also comes after a group of House and Senate Democrats on July 29 introduced legislation seeking to prohibit U.S. federal contracts for businesses that combine with foreign companies to avoid paying American corporate taxes. One of the sponsors of the bill, Rep. Rosa DeLauro, D-Conn., said Medicare and Medicaid federal contracts are an area she and others have been reviewing and will address as they move forward with the legislation. Walgreens relies partly on revenue paid for by the Medicare and Medicaid programs and any law prohibiting them from receiving those benefits -- had they converted -- would have had a big negative impact on the company's revenues. The group of House and Senate Democrats said they hope the measure will be included in a so-called tax extenders bill, which is considered must-pass legislation because it includes a package of key temporary tax breaks that expire at the end of 2013.
Walgreen's acknowledged in its statement about the deal that its decision to remain domiciled in the U.S. was driven partly by concerns about its brand image, in particular because a large part of its revenues is derived from government-funded programs. "The company also was mindful of the ongoing public reaction to a potential inversion and Walgreens unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs," it said.
The transaction requires clearance from Walgreen shareholders, whom the U.S. company courted Wednesday with a promised $3 billion share buyback and a 7.1% increase in the quarterly dividend to 33.75 cents per share.
It also set a fiscal 2016 revenue goal for the enlarged entity of $126 billion and $130 billion, said it is targeting adjusted earnings per share of $4.25 to $4.60, and declared it will trump a previously established $1 billion synergy goal from the union.
The parties expect the transaction to close in the first quarter.
Walgreen is taking advice from Goldman, Sachs & Co. and Lazard's Jeff Cohen, Gerald Rosenfeld
and Jason Wooten, with legal matters handled by Wachtell, Lipton, Rosen & Katz, and Allen & Overy LLP.
KKR representatives weren't immediately available for further comment. KKR said back in June 2012 that it had invested £1.22 billion in Alliance Boots in 2007, implying strong returns on the investment with the eventual exit.
--Ronald Orol in Washington contributed to this report.