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
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
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.