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Debt is a huge red flag for investors when companies make acquisitions. Case in point, Walgreens' (WBA +0.01%) existing debt weighs in at over $11 billion, and its acquisition of Rite Aid (RAD +0.00%) -- itself well in hock -- is going to grow the pile substantially. Given that, how should Walgreens shareholders react to the news?
A full transcript follows the video.
Kristine Harjes: What about as a shareholder of Walgreens? I'm not personally a shareholder, and I don't believe you are either. I think if I were, I would be a little bit concerned with their debt right now. This is a company that already had $11.7 billion in debt. They're going to be leveraging to make this deal happen, and they're also acquiring Rite Aid's debt, which is pretty substantial. Rite Aid is sitting on $7.3 billion in debt that is now going to be Walgreens' debt.
Michael Douglass: Right. CVS (CVS +0.00%) actually sits on a fair amount of debt on their own, so I'm not too worried about the debt. The real question is going to be: What about store cannibalization? Is this going to be a Rite Aid/Eckerd again? We certainly hope not. To be fair, Walgreens has been pretty aggressive about closing stores. They closed 75 this past quarter. You can probably imagine that those underperforming stores -- this is a point you brought up before -- were probably right next to a Rite Aid, right?
Chances are that in a lot of ways they're already planning for what this might look like. Hopefully this will reduce the possibilities of cannibalization. That said, I think it's still a very real possibility. These are fairly large footprint companies in the same line of business. This is not like Alliance Boots, where you really had a lot of stores in foreign countries which are not competing with the U.S. stores, obviously.
I think this is a 'wait and see' thing for Walgreens' shareholders. I've got to be up front: I think that CVS has had a much better strategy for approaching what is becoming of healthcare in the retail pharmacy space than Walgreens has. I think the sole focus on retail pharmacies isn't necessarily a good move long term as that industry is continually disrupted. I think CVS has done a lot more to invest in those disruptions and those disruptors.
If you are confident in your investing thesis of Walgreens already, and you have confidence in management, give them the benefit of the doubt. If you're like me, and you're a bit of a doubter of Walgreens' management and the direction of the company, this has done nothing to change that thesis.
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