Shares of Walgreen Co. rallied higher Friday, two days after the stock hit a 20-month low following the drugstore chain's announcement that it will buy a stake in European health and beauty retailer Alliance Boots.
THE SPARK: Walgreen, based in Deerfield, Ill., said Tuesday it will pay $6.7 billion in cash and stock to buy a stake in Alliance Boots, which runs the largest drugstore chain in the United Kingdom and has more than 3,300 health and beauty retail stores in 11 countries.
Walgreen's initial purchase amounts to a 45 percent stake. It has an option to buy the rest of the privately held company in about three years for roughly $9.5 billion based on Walgreen's share price and the current exchange rate.
The deal gives Walgreen, the largest U.S. drugstore chain, a presence in Europe and emerging markets like China.
THE BIG PICTURE: Walgreen shares sank after the announcement. Some analysts see the deal as a big risk for a company working through a sales slump in its home market. Walgreen sales have fallen for several months since it stopped filling prescriptions for Express Scripts Holding Co., the largest U.S. pharmacy benefits manager, at the end of last year.
Investors are worried about the company entering a continent saddled with debt worries in several countries. Another analyst also noted that Walgreen has limited experience in integrating deals of this size.
Walgreen operates 7,890 drugstores in all 50 U.S. states, the District of Columbia and Puerto Rico. It also runs worksite health centers and specialty pharmacies.
THE ANALYSIS: Some analysts also see a brighter side to the acquisition. Susquehanna analyst Bob Summers said in a research note the market reaction to the deal left him perplexed. He thinks the potential earnings power behind it has been overlooked.
Summers said Swiss-based Alliance Boots appears under-exposed to Europe's most challenged economies, and the expansion is a better alternative than increasing market share in the United States, where Walgreen might face antitrust concerns.
"In short, the strategic rationale is not too difficult to comprehend and, it appears to us, market participants are making the discussion more complicated than necessary," he wrote.
UBS analyst Jason DeRise said in a separate note the deal gives the companies better purchasing power for generic medicines and a platform for future partnerships, among other advantages.
SHARE ACTION: Up 2.9 percent, or 84 cents, to $29.99 in Friday afternoon trading, while the Standard & Poor's 500 index rose less than 1 percent. The stock tumbled 11 percent after closing at $31.96 on Monday. It then rallied after hitting $28.53 on Wednesday, its lowest price since September 2010.
Despite the recent rally, Walgreen's stock price is still far below the nearly $45 per share it fetched a year ago, before the drugstore chain said it would part ways with Express Scripts.