Friday, September 19, 2014

Walgreens and Alliance Boots Explain Their AmerisourceBergen Relationship

This week, Walgreens and Alliance Boots filed a “Registration Statement on Form S-4” that describes how the companies will transform into Walgreens Boots Alliance, Inc., a new Delaware corporation. (Link below.) The hefty 471-page filing, which will be the basis for a shareholder vote, has loads of interesting details on how the combined business will look.

Below, I highlight a few nuggets about the companies’ relationship with AmerisourceBergen, including equity ownership, Walgreens' distribution agreement, and the WBAD generic sourcing arrangement. This info had been previously disclosed, but only as part of a dense legal document. The S-4 summarizes the important points into a (somewhat) less cryptic format.

Read on for highlights. I’ll have more details on changing relationships between wholesalers and retail chains in our new 2014-15 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors, available next week.

Click here to read the entire S-4 submission from the SEC site. The details of the AmerisourceBergen relationship appear on pages 27 and 218-220.


When the Walgreens-AmerisourceBergen arrangement was first announced in March 2013, we learned that Walgreens and Alliance Boots have the right (but not the obligation) to acquire a 23% ownership stake in ABC. Under certain circumstances, they also have an option to buy another 5% of ABC’s stock. However, Walgreens and Alliance Boots can’t own more than 30% of ABC...unless (until?) they renegotiate a takeover deal.

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.

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.

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.

Thus, Walgreens and Alliance Boots could own 28% of ABC. Keep an eye on ABC’s stock (and buybacks) in 2016.

As Walgreens and Alliance Boots acquire ABC’s shares, they have the opportunity to add two directors to ABC’s Board of Directors. In May 2014, the ABC Board nominated Greg Wasson, Walgreens’ President and CEO, to the ABC Board.


From section 5.1 of the 2013 agreement, we knew that ABC can cancel the equity warrants if WBAD terminates the Generic Pharmaceuticals Purchasing Services Agreement.

The S-4 reminds us that Walgreens can shorten its distribution agreement if ABC cancels any unexercised warrants and open market purchase rights described above. In particular, Walgreens can reduce its 10-year distribution agreement to the greater of (a) a four-year term or (b) two years from the date it elects to exercise this right.


If Walgreens doesn’t complete the alliance boots deal, what happens to the ABC investment?

On page 27, the S-4 filing sheds new light on what happens if Walgreens doesn’t exercise its options to buy the remaining 55% of Alliance Boots, i.e., if shareholders revolt against the deal.

Alliance Boots can either (a) acquire 50% of the ABC shares then jointly owned by Walgreens and Alliance Boots through a joint venture entity, in exchange for 50% of the funding previously provided by Walgreens to the joint venture entity to acquire ABC shares (plus interest) (a “50/50 dissolution”) or (b) settle with Walgreens in cash to replicate the same economic impact as a 50/50 dissolution, but with Walgreens retaining 100% of the ABC shares

If Walgreens is able to designate a second director for ABC’s board of directors, then the second director would be an Alliance Boots executive.


Starting on page 48, you can read a blow-by-blow discussion of the companies’ inversion aversion analysis. The S-4 states:
“During the course of these discussions, Walgreens management concluded that, despite good faith efforts by all sides, the parties would not be able to arrive at an inversion structure that provided Walgreens with the requisite level of confidence of withstanding potentially extensive IRS review and scrutiny.”
The final word? Here’s what George Hill of Deutsche Bank had to say:
“While it is now beyond the point of debate, we note that none of the transaction experts that we spoke with saw any issues with Walgreen executing an inversion transaction and many other healthcare companies are either in the process of inverting or have consummated similar transactions.”
Hmmm. Perhaps this discussion is not truly over…now you got early warning.


If I may be so bold, perhaps WBAI should retain the services of noted management consultants Aerosmith. Click here if you can’t see the video.

1 comment:

  1. Based on this latest news, it still is really hard to understand how this will affect independent pharmacies that buy from ABC. Give that its 18 months since the transaction, is it even known if ABC independent pharmacy customers have gained anything positive out of this transaction?