Thursday, December 11, 2014

Walgreens Loses Its CEO: How Did We Get Here? What’s Next?

By now, you’ve surely read this press release: Walgreens President and CEO Greg Wasson Announces He Will Retire Following Completion of Merger with Alliance Boots

File this news under “expected surprise,” as this outcome has been building all year. Stefano Pessina will take over as acting CEO. Shocking, I know.

How did we get here? Who’s the next CEO? My summary and some speculations below.

WHAT HAPPENED?

Here are some key milestones that foreshadowed yesterday’s announcement, along with my comments along the way.

Walgreens Goes Global with Surprise Alliance Boots Acquisition, June 2012
It was a scant two and half years ago when Walgreens announced its acquisition of Alliance Boots.
"In 2007, Alliance-Boots was taken private in a leveraged buyout financed by Kohlberg Kravis Roberts and led by Stefano Pessina, who was also the driving force behind Alliance-Unichem. Mr. Pessina has made no secret of his desire to expand to the US. In March, he told the Financial Times: 'For us, being a global company is ... not wishful thinking, it’s a project.'”
A few weeks later, Walgreens resolved its ill-fated battle with Express Scripts.

Making Sense of ABC-Walgreens-Alliance Boots, March 2013
Walgreens announced (1) a 10-year agreement that made AmerisourceBergen (ABC) its primary brand-name drug wholesaler, (2) allowed ABC to source generic drugs and other products through the Walgreens Boots Alliance Development (WBAD) joint venture, and (3) gave Walgreens and Alliance Boots the right to acquire (given certain circumstances) up to a 28% ownership stake in ABC.
“The transaction puts Stefano Pessina ever closer to his long-held goal of building a truly global organization. In 2017, Pessina will be 75 years old. He will also be the single largest shareholder of Walgreens, Alliance Boots, and (by extension), AmerisourceBergen…The drug channels participants are all now playing on this billionaire’s chess board.”
FYI, there are updated details in September 2014’s Walgreens and Alliance Boots Explain Their AmerisourceBergen Relationship.

Inversion Uncertainty: Is Alliance Boots Really Acquiring Walgreens?, March 2014
Tax inversion is a wonky-sounding term to describe a company’s moving its headquarters from a high-tax nation to a low-tax nation. Last March, the debate went public.
”A corporate move to Switzerland would be bad news for Walgreens’ current management, who would likely be displaced by the Alliance Boots team. Walgreens’ Deerfield corporate offices would also shrink sharply in the name of ‘synergies’…At this point, Walgreens’ management can’t stop the Alliance Boots deal. Given Stefano Pessina’s post-deal ownership, inversion becomes more likely.”
Noise and Nonsense Over Walgreens’ Inversion Plans, July 2014
I was wrong about inversion (for now).
"Walgreens' management neglected to get in front of this story, so politicians and anti-Walgreens activists are leading the narrative."
I suspect however that Pessina and his team will revisit the inversion topic within a couple of years.

CFO and Contracting troubles, August 2014
The Wall Street Journal published a front-page story about Walgreen's "billion-dollar forecasting error" and an announced profit shortfall. According to the story, Walgreens “hadn't factored in, among other things, a spike in the price of some generic drugs that it sells as part of annual contracts.” See my comments in the August 2014 news roundup.

Based in part on the WSJ article, former CFO Wade Miquelon, who left last August, filed a lawsuit claiming breach of contract, defamation, and tortious interference. This Courthouse News Service  article contains surprising and embarrassing allegations about Walgreens’ internal management.

In Can Walgreens Fix Its Generic Drug Contracting Strategy? (October 2014), Walgreens executives opened up (a little) about the company’s payer contracting problems and the generic drug inflation that triggered its billion-dollar forecasting blunder.

Walgreens and Alliance Boots to Combine; No Inversion For You!, August 2014
After inversion proved too politically risky, Walgreens and Alliance Boots instead accelerated the formation of Walgreens Boots Alliance, Inc., a new US-based holding company.
“The company is (1) abandoning plans to do an inversion, (2) lowering its financial targets, (3) embarking on a $1 billion cost-cutting effort, and (4) reshuffling and combining the management teams. Stefano Pessina, who will be the combined company’s biggest shareholder, will have big strategic role. He’s reporting to Greg Wasson…for now.”
My snarky “for now” aside turned out to be shorter than expected.

WHAT’S NEXT?

The search for a CEO successor may already be underway, because Pessina will not want to be CEO for long. Despite this year’s management turmoil, I would not be surprised if the next CEO came from the Blended Management Team, announced last August.

Here are three focus areas for the new CEO:
  • Consumer-oriented retail management. Walgreens is accelerating its front-end margin expansion strategies. Consider that Boots UK pharmacies depend much less on prescription revenues than do Walgreens pharmacies. Non-drug sales are about half of Boots’ sales, compared with only about 25% of Walgreens’ sales. This disparity is very clear from my holiday snapshots, seen in My Visit to Boots UK: An International Pharmacy Photo Essay
  • International retailing experience. There are very limited geographic expansion opportunities within the slow-growth U.S. and EU markets. How will the company expand into the fast-growing BRIC (Brazil, Russia, India, or China) countries? Which retail brand—Walgreens or Boots—will be used for this expansion?
  • Cost reduction. Walgreens has a margin gap versus its peers. The new CEO will need to oversee the company’s $1 billion+ cost-reduction efforts, which are being led by CFO Timothy McLevish.
Needless to say, the new CEO must try to work with the largest shareholder in Walgreens Boots Alliance. But as Mr. Pessina says: “Do or do not. There is no try.”

A fun 2015, it will be.

7 comments:

  1. WAG shares up $3 at the opening Guess the market likes the wasson news

    ReplyDelete
  2. Either the Wasson News alone or the concept that everyone in retail is going to reduce de facto distribution costs via tumbling gas/deisel pricing through 2015...Dr Fein, any idea of what the change means for the enhanced in-store clinics that WAG was supposed to roll out in 2015?

    ReplyDelete
  3. What's glossed over in all of this is the decimation that has occurred at the front end level. I work between two districts in virtually every single senior staff member has quit due to working conditions. I work between two districts (80 stores) in a large city (200,000) and most stores are run with tech staffs who have pharmacy experience less than a year. Staff are "promoted" with little training and are usually staff who would not normally be promoted. They make speak of changes they need to make extends far beyond the leadership level. Right now the problems they have at the store level will make any future endeavors almost impossible to successfully implement. And this isn't even touching on the decimated IT infrastructure we're dealing with...

    ReplyDelete
  4. Adam, how do you get to 28% ownership in ABC? Shouldn't it be 7+8+8=23%?

    ReplyDelete
  5. Walgreens and Alliance Boots have the right (but not the obligation) to acquire up to a 23% ownership stake in ABC. Under certain circumstances, they also have an option to buy another 5% of ABC’s stock.

    Initially, Walgreens and Alliance Boots can acquire a combined 19.9 million shares of ABC’s shares on the open market, which would equal about 7% of ABC’s outstanding common stock (assuming full exercise of the warrants). As of August 2014, Walgreens had acquired 11.5 million shares of these 19.9 million shares. If ABC’s stock falls below $51.50 during the six-month period beginning in March 2016, then Walgreens and Alliance Boots can acquire an additional 14.2 million shares, which would equal an incremental 5% of ABC’s outstanding common stock, assuming full exercise of the warrants.

    ABC also granted equity warrants to Walgreens and Alliance Boots that are exercisable in 2016 and 2017 for an additional 45.4 million shares. Assuming full exercise of the warrants, Walgreens and Alliance Boots would collectively own an additional 16% of ABC’s outstanding common stock.

    ReplyDelete
  6. Thanks for the reply. I didn't realize WAG/AB could buy 5% more if ABC was below the strike price during the exercise period. Where can I find the full details of the deal?

    ReplyDelete

Related Posts Plugin for WordPress, Blogger...