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Walgreen Just Wasted Shareholder Money

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Wow, Walgreen (NYSE: WAG  ) may need to take whatever the pharmacist recommends for "buyer's remorse" at some point. Isn't $6.7 billion for 45% of U.K.-based drugstore chain Boots just a tad too expensive? And is it really the best time to be adding this kind of European flair?

I foresee big problems for Walgreen, and I plan to back up my hunch with a CAPScall.

Walgreen plans to fund the acquisition with cash and stock, and it will use $3.5 billion in debt to help finance the purchase. Standard & Poor's has already warned that if this comes to pass, it will "result in a meaningful deterioration of Walgreen's financial risk profile."

Alliance Boots isn't a completely unknown quantity here in the United States. Target distributes some Boots beauty products in its stores. But U.K.-based Boots is a real force in Europe and boasts 3,300 stores in 11 countries.

Walgreen has lost some of its competitive advantage to CVS Caremark (NYSE: CVS  ) and even beleaguered Rite-Aid (NYSE: RAD  ) after it failed to renew its contract with Express Scripts (Nasdaq: ESRX  ) , one of the largest pharmacy benefits companies in North America.

Walgreen's sales, comps, and earnings have suffered this year because of the disintegrated relationship with Express Scripts, while rivals have enjoyed the benefits of the falling out. CVS has even discussed having defecting Walgreen customers hitting its stores (and helping its financial outlook). Even Rite-Aid, which trades in penny-stock territory, reported a same-store sales increase of 2.5% in the first quarter.

Let's put it this way: Walgreen's paying $6.7 billion for half a stake in a drugstore chain that resides in an economic region we're all worried about right now. Let's put it another way: Microsoft (Nasdaq: MSFT  ) paid $8.5 billion to buy Skype outright, and at least Skype's an arguably transformative technology that could fit into Microsoft products and make them better and more useful. In the history of poor acquisitions, Microsoft may have a challenger to the throne.

It's a little bit hard to wrap one's brain around the mega-big bucks involved in the Walgreen deal, which could ultimately result in a full acquisition of Boots -- after shelling out even more money in the future.

This sounds like real trouble to me, and that's why I'm putting an "underperform" call on Walgreen in Motley Fool CAPS. You can check my track record here. Put your own CAPScall in CAPS, or add Walgreen to your Watchlist to see how this deal plays out.

Alyce Lomax owns no shares of any of the companies mentioned. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of Express Scripts Holding and Microsoft and creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (7) | Recommend This Article (9)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2012, at 7:05 PM, jaybird43 wrote:

    I have read opinions both ways today. But what i HAVE not seen in any articles including this one is hard facts. I get the feeling that no one(including this writer knows what Boots is worth. How about some hard data to back up"Gee that sounds like a lot of money. A lot of money is the 16 trillion dollars this country is in debt, a heck of a lot of people don't get that either.

  • Report this Comment On June 20, 2012, at 7:55 PM, chairmanwow wrote:

    Wow. Is this what passes for analysis at The Motley Fool?

    I don't have a clue whether the Boots acquisition is a good one or not. And after reading this piece, I don't think the author does either.

  • Report this Comment On June 21, 2012, at 10:30 AM, charles43 wrote:

    I agree with the two previous posters. Some dollars and cents rationale for the statement that Walgreens paid too much for the acquistion is needed.

    Also, finishing the S&P quote would make the article more honest.

    Thirdly, is the Motley fool saying Walgreens is only as smart as Bill Gates :}

  • Report this Comment On June 21, 2012, at 10:56 AM, ElCid16 wrote:

    Walgreen's (basically) has zero net debt, and has generated at leat $3.5b in operating cash flow in each of the past 3 years. I'm not sure why $3.5b in new debt is a big deal. Especially in such a low interest rate environment. I wish they financed the whole damn acquisition w debt.

    And to the author, what price do you think wouldn't have been a tad too expensive, and why? Or is your CAPS pick really just a "hunch"?

  • Report this Comment On June 21, 2012, at 11:10 AM, ElCid16 wrote:

    Per Wikipedia, Boots operating income is about $2.3b annually. So they paid something like a 6.5 times ebitda? These are bote calcs....

  • Report this Comment On June 27, 2012, at 5:11 PM, bossman5000 wrote:

    Bad article

  • Report this Comment On July 19, 2012, at 7:12 PM, charles43 wrote:

    So where was the Motley Fool's guidance on the Express Scripts reconciliation ?

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