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Vote Against Approval of Issuance of Shares (Item 2)
to Complete Acquisition of Alliance Boots
at December 29, 2014 Special Meeting
of Walgreen Shareholders
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CEO Wasson out, AB’s Pessina in! What Just Happened?
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Paying for the privilege of being taken over.
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Why vote AGAINST the full takeover of AB?
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Alliance Boots: Looking under the hood shows sand in its growth engine
Europe > 90% of total
Wholesaling = 67% of total
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Deal Overview: Selected Timeline of Walgreen’s Complex and Unstable Transaction
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Deal Overview: The unusual two-step business combination failed to give investors timely vote
Transaction | Date | Deal Term | Consideration | Governance |
Joint venture, | Aug 2012 | “Step 1” | $4.0B cash | Pessina & Murphy |
equity swap | 83.4 M shares | (KKR) join WAG’s | ||
(45% stake in | board; hold 7.7% and | |||
AB) | ~0.7% respectively | |||
Full Acquisition | Pending | “Step 2” | $4.9B cash | ~16 to 20% ownership |
144 M shares | Pessina Exec Vice | |||
(AB’s Debt) | Chair |
2012 Projections | 2014 Realities | |||||
2016 operating profit | $ | 9 - $9.5B | $ | 7.2 | B | |
Combined debt | $ | 11 | B | $ | 17.9 | B |
Total cost of deal | $ | 28.9 | B | $ | 35.7 | B |
EV/EBITDA (2015) | 11.5 | x | 14.8 | x | ||
AB’s annual operating | 9 | % | 4.4 | % | ||
income growth |
10 | |
Deal Overview: | |
Market reaction to deal ambivalent |
Walgreen’s share price has benefitted from a bull market, and has tracked a similar trajectory to close competitor CVS since the transaction was announced.
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Acquisition Unnecessary: Paying for Pessina’s Empire Building, not for Synergies
Synergies to date are procurement from purchasing JV. | ||
o |
Probably a “majority” of procurement synergies can occur without second-step, according to Walgreen CFO.
| |
Top two competitors have opted for the capital light approach of procurement joint ventures. |
o | CVS JV with Cardinal |
o |
Rite Aid JV with McKesson
|
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Acquisition Overvalued: Excessive premium the road to buyer’s remorse
WAG is Paying EV/EBITDA Forward Multiple for 13
Step 2 Far in Excess of Comparables
Mid-point valuations of fairness opinions provided by Goldman Sachs and Lazard compared to second step transaction cost based on consideration valued at $13.96 billion (based on Aug. 11. 2014) and expected debt.
WAG is Paying up to a 93% Premium for Remaining Equity of AB 14
OVERVALUED: COST OF STEP 2 EQUITY
Blue = Cost to WAG shareholders Red = Goldman Sachs Green = Lazard
Due to AB’s privately-held status, the premium over and above market value is not available from per-share data. Using the midpoint valuations performed by Lazard and Goldman Sachs pursuant to the three valuation methodologies, we illustrate the takeout premiums using a second-step consideration value of $13.96 billion (based on Aug. 11. 2014 valuation date).
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The Deal is Risky: Threats to Alliance Boots Performance and Synergies
Continuing Headwinds from Europe | ||
Austerity policies driving down drug prices, set to remain in place.
| ||
Timing, Likelihood of Synergies Uncertain | ||
Procurement synergies are back-loaded. | ||
Top-line synergies promised but appear unlikely. |
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The Deal is Risky: Doubtful beauty synergies make deal look even uglier
Boots’ beauty strategy faces challenges in US | ||
Differences in US and UK markets make importing Boots’ beauty success unlikely. | ||
US customers resist drugstores for beauty, favor high-end specialty retailers.
| ||
Margins are slashed for Boots products in US | ||
Boots products cost up to 55 percent less at Walgreen. |
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The Deal is Risky: The long line of British failure in America
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Acquisition poorly negotiated: Benefits AB’s Sellers
WAG Historical EV/EBITDA Trading
Acquisition poorly negotiated: Long-term
shareholder voices effectively silenced
Failed to protect shareholder franchise by: | |||
o | Avoiding shareholder vote for 2 years: | ||
o |
Shareholders should have more say…“The way WAG has structured [this deal] treats shareholders very poorly…Shareholders have no real say … since the minimum purchase price ...is essentially set now even though there is no shareholder vote” - Barclays Equity Research, 20 June 2012 |
o |
No provision for a vote of the disinterested shares in Second Step, when Pessina already holds 7% of voting shares
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Lacks Credible Execution: Acquisition comes at time of strategic missteps and internal acrimony.
WAG shocked market with $2 billion forecast reduction in August; 20% reduction in FY2016 EBIT goal for AB/WAG, stemming from: | ||
Internal miscalculation of generic pricing and Medicare Part D reimbursement rates | ||
Underperformance in both AB and WAG’s core business Ï AB growing at half the rate expected in 2012
| ||
Controversy over the departure of CFO and other top-ranking executives
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Increasing pressure from hedge funds to prop up stock: | ||
Undertake a tax inversion | ||
Pursue share buybacks |
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Lacks Credible Execution: Disclosure leaves shareholders in dark on critical issues
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Jana settlement further clouds interests of long-term shareholders
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Summary: Why vote AGAINST this deal?
Appendix
Trend to Procurement Joint Ventures