DealBook: Walgreen, in Acquiring Rest of Alliance Boots, Will Remain U.S-Based

Photo A Boots pharmacy in London.Credit Matt Dunham/Associated Press Related Links

LONDON – The Walgreen Company said on Wednesday that it would pay about $5.27 billion in cash, plus shares, to acquire the rest of the British pharmacy chain Alliance Boots that it did not already own, but would keep its corporate headquarters in the United States.

The deal comes as American companies have rushed to pursue mergers with smaller foreign partners to reincorporate overseas and to avoid higher corporate taxes in the United States, a tactic known as an inversion.

Inversions have faced increased scrutiny from American lawmakers in recent months, and to engage in an inversion deal, Walgreen would have been forced to renegotiate its existing agreement with Alliance Boots, which the British retailer was unwilling to do, according to a person briefed on the matter.

Walgreen said that it extensively evaluated doing an inversion, including the financial benefits and the public reaction, given the company's "unique role as an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs."

"The company concluded it was not in the best long-term interest of our shareholders to attempt to re-domicile outside the U.S," Gregory D. Wasson, Walgreen's president and chief executive, said in a news release.

But he said that the full takeover of Alliance Boots "was in the best interest of our shareholders, and with this decision, we are now moving forward on an accelerated basis to create the global leader in pharmacy-led health and well-being."

Mr. Wasson is to continue to serve as president and chief executive of the combined company.

The deal, which requires shareholder and regulatory approval, is expected to be completed in the first quarter of 2015.

Walgreen, based in Deerfield, Ill., took a 45 percent stake in the British chain in 2012 and had a three-year option to acquire the rest of the company. Walgreen paid about $6.7 billion for its stake two years ago.

Under the deal announced on Wednesday, Walgreen would pay 3.13 billion pounds, or about $5.27 billion, in cash and about 144.3 millions shares of Walgreen to acquire the 55 percent of Alliance Boots it did not own from other owners. They include Kohlberg Kravis Roberts and the Italian billionaire Stefano Pessina, the Alliance Boots executive chairman.

Mr. Pessina is to serve as vice chairman of the combined company, responsible for strategy and mergers and acquisitions.

The combined company, which would be based in the Chicago area, would operate about 11,000 stores in 10 countries and create the world's largest pharmaceutical wholesale and distribution network with more than 370 distribution centers.

Walgreen has faced pressure from large shareholders, including the activist hedge fund Jana Partners, to improve its gross margins in recent years.

Photo Senator Richard Durbin of Illinois said he was "thrilled" Walgreen would remain based there, instead of moving to  Europe.Credit M. Spencer Green/Associated Press

One option was cutting the company's taxes, namely by reincorporating overseas through a restructured Alliance Boots deal. Alliance Boots, even though the bulk of its retail operations are in Britain, has its corporate headquarters in Switzerland.

Walgreen will instead focus on cost controls, saying on Wednesday that it expected to achieve $1 billion in cost savings by fiscal 2017.

Inversions have increasingly drawn the ire of Washington, with lawmakers describing the tactic as unpatriotic and a tax dodge. Treasury Secretary Jacob J. Lew said this week that the Obama administration was considering ways to halt the practice without the need to draft new laws.

These types of transactions have become popular with a variety of American companies in recent years, particularly in the pharmaceutical sector.

AbbVie and Mylan, for example, have announced deals to move their corporate citizenship overseas in recent months, and the pharmaceutical giant Pfizer unsuccessfully pursued the British drug maker AstraZeneca this year in hops of engaging in such a transaction.

In the Walgreen deal, the new holding company would be renamed Walgreen Boots Alliance and have four divisions: the Walgreen drugstore business in the United States, the Boots pharmacy chain in Britain and Ireland, the pharmaceutical wholesale and retail business outside Britain and the United States and a global pharmacy brands business.

Walgreen was advised by Goldman Sachs and Lazard and the law firms Wachtell, Lipton, Rosen & Katz; and Allen Overy.

Michael de la Merced and Alexandra Stevenson contributed reporting from New York.

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