Photographer: David Paul Morris/Bloomberg

Here's What Wall Street Thinks of Walgreens Deal Speculation

  • Analysts question the value of a Walgreens-Amerisource deal
  • Walgreens already has a JV and owns a stake of Amerisource

Walgreens Boots Alliance Inc. may be making its own game-changing move after a Wall Street Journal report late yesterday said Walgreens had made an early approach to a drug distributor, AmerisourceBergen Corp. The speculated move follows on the heels of CVS Health Corp’s “revolutionary” play for Aetna Inc., which combined the pharmacy with a health insurer.

The health-care sector, and pharmacies in particular, are hoping to fend off the much speculated entry of Amazon.com Inc. into the pharmacy space. Amazon has yet to announce a definitive move. So far, it has only revealed an alliance with Berkshire Hathaway Inc. and JPMorgan Chase & Co., which promises to attack what Warren Buffett called the “hungry tapeworm” of American healthcare.

The speculated Walgreens, AmerisourceBergen tie-up isn’t garnering quite as much praise with Wall Street analysts as the CVS, Aetna deal. Walgreens shares are trading up about 0.5 percent, recovering from a 1.4 percent decline in early trading. Walgreens is already AmerisourceBergen’s top holder with a 26 percent stake, and a deal may add to Walgreens earnings per share. But Jefferies calls it a “headscratcher for investors,” as Walgreens already benefits from a joint venture between the two companies. RBC writes “this wasn’t the vertical integration we were excited about.”

RBC, George Hill

(WBA outperform, PT $88)

“While the deal could represent an attractive potential exit for ABC shareholders, we are not sold on the deal for Walgreens”; analyst instead thinks Walgreens “should focus on its offering to its pharmacy and payer customers and acquire around that solution.”

“We find it difficult to see the merits of this transaction besides headline earnings accretion. Walgreens would be exposing itself to a more challenged segment of the market in pharmaceutical wholesaling, which has long-term structural challenges."

He added that "since ABC already participates in Walgreens GPO WBAD, it is already maximizing its generic drug purchasing scale, so there is little to be gained there,” he writes, referring to the Walgreens Boots Alliance Development GmbH, a generic purchasing consortium.

Jefferies, Brian Tanquilut

(WBA buy, PT $93)

A deal for Amerisource “would be EPS accretive but would be a headscratcher for investors.” While a combination would not be a total surprise, analyst wonders if report may be related to Walgreens exercising its option to increase its Amerisource stake to 30 percent.

“While we see strategic value in joining forces with a leading drug distributor such as ABC, we believe WBA has already pursued this opportunity when it formed the WBAD purchasing consortium with ABC and acquired its minority stake in the company."

He added that WBA has been "openly discussing their intention of continuing to pursue vertical-integration deal opportunities, but acquiring the rest of ABC, while financially-rational, begs the question on what incremental strategic value the deal would bring, especially in light of recent moves by CVS and AET and even ESRX buying EviCore.”

“As the broader healthcare sector focuses more on moving specialty drug administration out of facility-based (hospital/physician’s office) settings, gaining a strong foothold in specialty through ABC could be a valuable strategic move.”

Baird, Eric Coldwell

(ABC outperform, PT $112, WBA outperform $86)

“We’re reserving judgment in lieu of additional comments by the companies or from reports with more substance.”

“We’re currently struggling to see the strategic allure of the combination for WBA. This seems like a relatively low-risk, but potentially also low-reward, opportunity – and one that could come with real opportunity costs down the road.”

Wells Fargo, Peter Heinz Costa

(WBA outperform, PT $82)

“We believe the acquisition of ABC by WBA makes sense given the already existing long­term partnership and limited ability to merge laterally. Furthermore, we believe a potential combination could help lower costs and wring out synergies in the U.S. drug distribution channel, and better position WBA competitively particularly in the face of increasing competitive threat from a possible Amazon entry. However, a merger might risk alienating ABC’s retail pharmacy customers that compete with WBA’s pharmacies.”

“Such a move by Walgreens seems to echo Mr. Pessina’s [WBA CEO] strategy in Europe­­ combining wholesale pharmaceutical distribution and the retail pharmacy businesses ­­and likely implies that Walgreens has less interest in entering the pharmacy benefit management space.”

Goldman Sachs, Robert Jones

(ABC buy, PT $111, WBA neutral, PT $77)

“While we do not take a view on the likelihood of a deal, we would view WBA’s potential interest as a signal that companies in the supply chain are looking for vertical integration and new avenues of growth in an environment where pricing has pressured margins and the fundamental outlook remains muted. However, we believe the majority of synergies in similar transactions have come from combining generic purchasing scale, which the companies already do jointly, and such a deal could increase attrition among ABC’s independent retail pharmacy customers.”

Needham, Kevin Caliendo

(WBA buy, PT $88)

Analyst sees a Walgreens deal to buy the rest of Amerisource that it doesn’t already own at a 25% premium to yesterday’s close, or about $112 per share; could be as much as 83 cents accretive in the first year, and add as much as 93 cents in the second year. Walgreens would probably see only “modest synergies.”

“It’s hard to argue against potentially $0.80+ in EPS accretion, but it does make us question WBA’s near-term position, especially as CVS is working to buy AET."

He notes that "we don’t think this deal prevents WBA from playing the vertical integration game, and maybe it strengthens its financial position for a larger transaction later, but we are not sure investors will give WBA full credit for an ABC purchase. We note that one immediate benefit of a deal with ABC is that it could further strengthen WBA’s specialty presence.”

JPMorgan, Lisa Gill

(ABC neutral, PT $105, WBA overweight, PT $90)

Analyst highlights that the original agreement between Amerisource and Walgreens contained standstill provisions that precluded Walgreens from owning more than 30 percent of the drug distributor, although restrictions don’t prohibit Walgreens from making private proposals to Amerisource. She sees “limited” synergies. Estimates a potential deal at around $107 per share could add 55c of accretion to Walgreens adjusted earnings per share in fiscal 2019.

“In our view, outside of timing, a potential WBA-ABC deal would not come as a major surprise. Note that the WBA management team has historically remained narrowly focused from an M&A standpoint, staying within the core retail pharmacy and pharma distribution businesses, and WBA’s existing ownership stake in ABC would make it a likely M&A target.”

Cowen, Charles Rhyee

(WBA outperform, PT $80)

“In our view, the strategic rationale for this transaction would be the incremental benefits from vertical integration, although substantial synergies from generic procurement have already been realized.”

“One notable benefit we see from the potential acquisition of ABC is the ability to leverage ABC’s logistics infrastructure for next day delivery of front-end goods purchased online at WBA retail locations.”

Offering such a service could mirror Boots next-day pickup program in the United Kingdom, while potentially mitigating the potential Amazon threat.

Leerink, David Larsen

(WBA market perform, PT $75, ESRX market perform, PT $75)

“While many investors may view this transaction as being a defensive move against AMZN or CVS/AET, we believe the transaction is very consistent with Stefano’s long-term strategy.” Express Scripts Holding may trade lower as Walgreens was thought to be a potential buyer.

“We had always assumed that WBA would be a good suitor for ESRX. Stefano Pessina, Walgreens CEO, however, has indicated on several instances that he wants to be able to do deals with a multitude of entities in the supply chain. A move to acquire ABC makes sense in our view because it would potentially enable WBA to keep better relationships with plans such as Optum that compete with ESRX.”

A deal value may be about $107 per share and would be accretive to Walgreens earnings even with a 50-50 split between stock and debt.

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