Why Walgreen Couldn't Risk Quitting the U.S. for Lower Taxes Abroad

The largest U.S. pharmacy chain, Walgreen, has decided to remain in the U.S. as it buys the rest of U.K.-based Alliance Boots, even after it extensively studied how to save on taxes through relocation.

Walgreen ended more than four months of speculation with the decision to keep the company in suburban Chicago. Investors led by Jana Partners had urged the company to move its tax domicile overseas as part of a $15 billion cash-and-stock deal to acquire the remaining 55 percent of Boots it doesn’t own. The pharmacy giant said on Wednesday it would finish the Boots purchase but could not find a viable structure to pursue a tax “inversion,” by which it would take advantage of lower British tax rates.

The domicile consideration drew political fire from leading Democrats, including President Barack Obama and U.S. Senator Richard Durbin, a Democrat from Walgreen’s home state of Illinois. The retailer also faced the possibility of a prolonged public backlash, with millions of Americans potentially avoiding the company’s stores. Walgreen derives the majority of its income from U.S. sales and has stores in every state.

A number of pharmaceutical companies have pursued inversions in recent years, but Walgreen would have been the first retailer to pursue the strategy. Unlike drug makers, Walgreen’s business relies on direct contact with consumers. It seems that the potential gains from paying corporate taxes lower than the U.S. rate of 35 percent rate lost out to the considerable risk of legislative backlash and the alienation of consumers.

Walgreen Chief Executive Officer Greg Wasson said the company had analyzed numerous “structures” for making an inversion work but ultimately could not overcome concerns about “the potential consumer backlash and political ramifications” if the Internal Revenue Service challenged the move. The U.S. Treasury, too, is exploring methods to discourage such inversions by U.S. companies. Walgreen also faced the significant risk of lost business with the U.S. government, Wasson noted, given the company’s heavy reliance on reimbursements from Medicare.

For many analysts, however, the company’s decision to remain based in the U.S. was overshadowed by a weak outlook for much of the next two years, in which profit growth is expected to be flat because of higher costs of generic drugs and lower reimbursements from Medicare. Executives described 2015 and 2016 as “a period of reset” for Walgreen as it integrates Boots and tries to rework wholesale deals that have become less profitable.

The news sent Walgreen shares down more than 16 percent in pre-market trading, following a 4 percent drop on Tuesday, when investors first heard that the company would not realize the tax savings from an inversion. The shares were off more than 13 percent in the early regular session. SkyNews reported on Aug. 5 that Walgreen directors had decided against a relocation. The company also said on Wednesday it will repurchase $3 billion of its shares and increase its annual dividend by 7 percent, to $1.35 per share.

Walgreen purchased 45 percent of Boots in 2012 for $6.7 billion with an option to acquire the rest by August 2015. The combined company will be led by Wasson, with Boots Chairman Stefano Pessina serving as executive vice chairman. The merged company will have about 11,000 stores and 350,000 employees in 20 countries. “We will have the ability to do more than anyone else in the industry, due to scale and reach,” Wasson said on a conference call.

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