Walgreens to complete purchase of Alliance Boots in £5bn deal

Last evenings announcement by Walgreens that they have decided remain in the US and are expected to announce shortly their decision to complete their acquisition of Alliance Boots will impact your WBAD dealings.

Their decision not to move their headquarters to the EU (tax inversion) means the time-pressure is off re acquisition, meaning that they can avail of the 6 months acquisition-window beginning in February 2015.

Remaining in the US means that Walgreens-Boots will pay corporation tax on US earnings @ US rates of 36%, probably making them subject to pressure from some major shareholders.

It also means that WBAD will have the buying muscle of 3xAB turnover….

In other words, some new dots to connect in your dealings with WBAD…

Watch this space

Update: US Tax Inversion moves may speed up via existing law..

Further to Friday’s blog post below, it appears that Obama may not have to introduce new legislation to prevent current and future tax inversion moves by US multinationals.

In fact, according to an article in The Irish Times, Obama could invoke a 1969 tax law that would restrict foreign companies using inter-company loans and interest deductions to reduce their tax bills. This could remove the key advantages of US companies taking over foreign companies and transferring their tax addresses to a more advantageous tax environment.

In practice, this means that companies* in the acquisition-pipeline will need to radically accelerate the process in order to avoid restrictions.

In other words, the Walgreens – Boots acquisition is now in fast-forward mode… 

Ready?

* It is not clear whether  historic tax inversion companies will be impacted by the same legislation

Walgreens-Boots, where next, when?

Walgreen Co, the largest U.S. drugstore operator, withdrew its profit and revenue forecasts for 2016 on Tuesday, saying it had yet to work out several aspects of its planned acquisition of European drug retailer Alliance Boots Holdings Ltd.

Walgreens, which bought 45% of Alliance Boots in 2012, and has an option to buy all of the Switzerland-based company in 2015, said it would update investors about the proposed purchase of the rest of the Europe's largest pharmacy chain owner and issue a new forecast by late July or early August. Combined synergies continue to generate savings albeit slightly lower than forecast, hence the withdrawal of the 2016 forecasts.

The real issue is the probability that Walgreens will respond to pressure from some shareholders to do a so-called "tax inversion" deal with Alliance Boots that would shift Illinois-based Walgreen's tax domicile overseas and reduce its tax bill. Their US tax rate is 36% and this would reduce to 21% if they transferred to Switzerland.

A possibility has to be consideration of availing of Ireland's tax rate of 12.5%.

However, to quote David McWilliams, the global ground has shifted and countries such as the US will not tolerate the wholesale looting of its corporate tax base and the countries that facilitate this behaviour.

This could mean that globally harmonized tax rates are on the way, but may take several years to implement.

Meanwhile, companies in Walgreens' position may choose to make a change sooner, rather than later.

For this reason, suppliers might usefully anticipate the possibility of Walgreens completing their acquisition of Boots earlier than the 2015 deadline... 

Time for NAMs to complete some what-ifs on a 2014 move, and act accordingly?

Walgreens likely to bid for early Boots takeover?

Alliance Boots could be wholly owned by America’s largest drug-store chain within eight months. Walgreens, owners of a 45% stake, have an option to buy the remaining 55% between February and August next year.

Meanwhile, Alliance Boots already has 2,487 shops in the UK which includes 2,385 pharmacies and an additional 750 pharmacies could turn it into the 800 pound ‘gorilla in the market’.

However, an attempt to buy the whole of the Co-op’s pharmacy business would be likely delayed by the UK’s Competition and Markets Authority (CMA), probably leading to a prolonged sell-off of overlapping outlets. 

The key issue for NAMs is ‘Why the rush?’
Given that an advantage of the move would allow Walgreens to re-domicile its tax base to the UK or more likely Switzerland, thus reducing its corporation tax rate from the US 37% to the UK 21%, and even less in Switzerland, the decision is a no-brainer…

Also, as such a move would be the latest in a succession of tax inversion moves by leading US companies, it is likely that the US government will try to limit potential losses to their exchequer by interfering in the process before long…

So, the sooner, the better…especially as the partial merger has already yielded $154m in synergies, more than the anticipated $150m, i.e. the merger is patently working, in stock-market terms…

Unfortunately, such moves added to the possible Co-op bid, have placed Walgreens and Boots above government radar in a number of tax jurisdictions, likely to cause much potential distraction when the company simply wants to achieve global scale as soon as possible.

Meanwhile, NAMs and the retail competition could be advised against ‘waiting to see what happens’ instead of anticipating that Walgreens–Boots will simply take these ‘distractions’ in their stride.

In other words, time for NAMs to climb aboard now and incorporate WB into their global trade strategies, before WB does it on their terms…

Dixons Carphone - why Walgreens-Boots is different...

The Dixons Carphone merger is the latest in a series of retail unions’ response to structural change in retail…

Key metrics
The £3.8bn 50-50 partnership to be called Dixons Carphone will result in a £12bn turnover company, made up of Carphone’s £3.7bn and Dixons £8.2bn.
In terms of stock market value, Carphone's market capitalisation is £1.9bn and Dixons' is £1.87bn
Carphone's 2,037 stores worldwide and Dixons' 947 stores will overlap and synergies will result in annual cost cuts of at least £80m within three years.

Previous retail mergers
Think about the troubled history of retail unions (see Alex Lawsons’ article in the Independent for details) so far:
- Abortive Carphone - Best Buy European joint venture in 2008
- Asda's doomed merger with furniture specialist MFI in 1985
- Morrisons’ takeover of Safeway in 2004 took longer than expected to bed in..
- The Co-op – Somerfield larger store sell-off
- Asda's acquisition of Netto in 2010, sell-off of 25% stores
- Kingfisher's troubled merger of B&Q with the French DIY retailer Castorama in 1998
- Kingfisher’s attempted a merger with Asda in 1999, resulting in Walmart bid

NAMs have to ask themselves if the Dixons-Carphone merger has enough potential to survive, or is even worth the effort…

Meanwhile, the Walgreens-Boots takeover appears to have a number of advantages
- Geographically complementary in that Walgreens is US only, Boots is rest-of-world
- Broadly complementary business philosophies and product assortments
- Potential synergies re retail expertise exchange
- Purchasing synergies already realising $154m

However, the real advantage over previous retail unions arises from the two-step deal (i.e. part–purchase in 2012, final takeover by 2016) which was designed to allow Walgreens and Alliance Boots to come together gradually and integrate, while continuing to drive their independent strategies in the first years of collaboration…

Sometimes slow is better, even in FMCG retailing…

Walgreens urged to leave US to gain tax benefit - a step too far for the US authorities?

According to the Financial Times, Walgreens has come under pressure from an influential group of its shareholders who want the US pharmacy chain to consider relocating to Europe, in what would be one of the largest tax inversions ever attempted.

At a private meeting in Paris on Friday, investors owning close to 5 per cent of Walgreens’ shares lobbied the company’s management to use its $16bn takeover of Swiss-based Alliance Boots to re-domicile its tax base.

Whilst such a move would be attractive to shareholders, coupled with similar cases and especially the focus on taxation of Google, Amazon and Apple, given the state of the US economy, it seems likely that the US government will try to block the move.

In doing so, it not only means major distraction for Walgreens-Boots management in the short term, with inevitable impact on supplier-retailer implications at street level, it also provides a way to make the question of merger company taxation a centre-stage issue globally…

In other words, the US government could bring forward the issue of taxing US companies on their global earnings, challenge the viability of corporation tax vehicles such as the so-called double-Irish tax arrangements in Ireland, and intensify the pressure by the French/EU governments to eliminate low taxation rates in member countries…

However, for suppliers to Walgreens-Boots, the real tail-sting was another agenda-item tabled at the same meeting whereby the investor group told Messrs Wasson and Pessina that they wanted to see a greater role for Boots’ management team in running the merged business….

The real Boots agenda emerges?
…and given that Boots management have more global experience than their Walgreens colleagues, this has to mean W-B flexing their international muscles in term of optimising prices and terms disharmonies, at least…

Watch this space...

Friday What-if: Why CVS Is Quitting Tobacco and the UK/EU implications

CVS Caremark Corp is a $123bn American retailer and health care company that has announced it will stop selling tobacco in October 2014, and focus on healthcare provision.

Respondents to Andrew Sullivan's blog add some interesting insights:

• CVS own Caremark RX, a huge pharmacy benefits manager (PBM), managing the prescription drug components of Medicare and other public and private insurance programs
• Pharmacy chains have been providing the care that more traditional medical practices cannot, with CVS clinics rising from 800 to 1,500 by 2015...
• CVS has between 30 and 40 partnerships with healthcare systems across the US
• CVS shares the retail-clinic space with Walgreens, Target and Walmart, and the CVS tobacco move could cause these three players to make similar moves re. tobacco, alcohol and even shotguns..
• Junk food and drinks have to come under the same spotlight as the healthcare market expands...
• The $2bn lost in tobacco sales will need replacing...

So, apart from some fundamental changes in US retailing, the key issue for UK/EU NAMs has to be the impact of McKesson and Walgreens expansion into Europe on CVS.

What-if CVS decide to copy the McKesson move and acquire some healthcare wholesalers, say Phoenix for starters?

To give you some idea of the scale of the issue and the money involved, some 2012 sales figures:

CVS Caremark                    €90.5bn
McKesson-Celesio              €115.3bn
Alliance Boots-Walgreens    €80.7bn
A.S. Watson                       €14.2bn

Apart from pushing Alliance Boots-Walgreens down into third place, with the right acquisitions, CVS could even take the No.1 slot...

Watch this space...