For months, the Walgreen drugstore chain has faced a difficult choice: Renounce its US citizenship to cut its tax bill and thereby risk angering Washington lawmakers and possibly even its own shoppers, or shrug off investors who have been pressuring it to improve its financial performance.
On Wednesday, the company, based in Deerfield, Illinois, chose not to pursue the tax maneuver — called an inversion — as part of its acquisition of the British pharmacy chain and drug wholesaler Alliance Boots GmbH. Walgreen, which already owns a 45 percent stake in the company, agreed to acquire the remainder of Alliance Boots for about US$5.27 billion, plus shares.
It was not an easy decision.
When details of the deal emerged on Tuesday, Walgreen’s share price fell, underscoring that points earned with Washington do not necessarily translate into points with Wall Street.
Concern that politicians are taking a harder line on inversions appeared to send shareholders in some of Europe’s biggest pharmaceutical companies — actual and potential targets — heading for the exits on Wednesday.
Walgreen president and chief executive Gregory Wasson said that ultimately a complicated inversion was “not the right course of action” for the company.
The decision to keep its corporate headquarters and tax domicile in the US came after a “rigorous” and “extensive” review by the company’s board, the firm said. The board had hired outside tax experts and formed a special committee of independent directors to consider its options.
Last year, Walgreen paid taxes at a rate of 37.5 percent, nearly twice as much as the 20 percent rate at which Alliance Boots is taxed. While the bulk of its retail operations are in the UK, Alliance Boots has its headquarters in Switzerland.
Walgreen has been under pressure from large investors like the activist hedge fund Jana Partners LLC to put in place aggressive cost-cutting measures.
Earlier this year, some of these shareholders urged the company to use its planned acquisition of Alliance Boots to also move its tax base, a plan that Wall Street analysts calculated could save Walgreen billions of US dollars over the next five years.
Yet for Walgreen directors considering whether to pursue an inversion, a number of major concerns soon surfaced: a potentially lengthy review by tax authorities in the US and a possible adverse reaction from US consumers and lawmakers. Government contracts to supply drugs are an important part of Walgreen’s business.
“The company and the board decided they needed a higher level of confidence to withstand what would most certainly be an intense, protracted review by the IRS [US Internal Revenue Service] and the potential downside of that for a period of time,” said Wasson, who is to serve as chief executive of the combined company.
The buyout is set to create a combined company with about 11,000 stores in 10 countries.
It would also create the world’s largest pharmaceutical wholesale and distribution network with more than 370 distribution centers.
The potential pricing power of this market position was an important factor behind the deal.
Both companies are facing pressure on profit margins as the costs of generic drugs rise and government and private insurance programs are paying out less in terms of reimbursements, Wasson said.
Walgreen also hopes that it can improve profit margins within its stores in the US by using some of the same strategies that have been successful for Alliance Boots in the UK and Ireland, where Alliance Boots has the bulk of its retail outlets.
Unlike Walgreen, which has a strong direct competitor in CVS Caremark Corp, Alliance Boots, with about 2,500 stores in the UK, faces the bulk of its competition from a variety of rivals including smaller pharmacies, supermarkets, and independent beauty and cosmetics stores, Alliance Boots executive chairman Stefano Pessina said.
“The competition is very strong in the UK,” Pessina said.
An Italian billionaire, Pessina is set to serve as vice chairman of the combined company, and is to be responsible for strategy and mergers and acquisitions.
Walgreen first took a stake in Alliance Boots in 2012, paying about US$6.7 billion for 45 percent of the company. That deal included a three-year option to acquire the rest of Alliance Boots, which Walgreen has exercised early.
The deal announced on Wednesday is set to see Walgreen pay £3.13 billion (US$5.27 billion) in cash and about 144.3 million shares of Walgreen to acquire the 55 percent of Alliance Boots it does not own from its other shareholders, which include the private equity firm KKR & Co LP and Pessina.
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