Walgreen (WAG) fell more than 6% after it announced it will be buying Alliance Boots, a European health and beauty retailer, for $6.7 billion. The market seems to be disappointed with the deal and I agree with the reasons why.
Walgreen is taking a 45% stake in Alliance Boots. This deal will both be paid for with stock and cash. Walgreen will use $4 billion in cash and 83.4 million in shares in order for it to complete the acquisition. So the acquisition will dilute shareholders to some point.
The two main concerns that I see with this acquisition seem to be pretty clear. The first is in regard to expanding into Europe. I believe this is a poor decision simply based on the turmoil that is happening. With deep spending cuts about to take place in the EU, its unclear how much Walgreen plans to monetize in this region.
The other reason this deal does not seem to be good for Walgreen is because of the price they are paying for the company. Walgreen expects the acquisition to increase EPS by 23 - 27 cents per share. Based on outstanding shares, this means that Walgreen's 45% stake will bring in around $235 million in earnings annually. This is actually quite disappointing based on the purchase price of $6.7 billion. Walgreen is essentially paying 28x annual earnings. In addition, Alliance Boots has around $11 billion in debt, meaning that the company is fairly leveraged.
I think this acquisition is a poor move by Walgreen. They overpaid for a stake in Alliance Boots. They also plan on expanding in a region where uncertainty abounds. There is no telling what can happen in Europe. If a recession takes hold, then Alliance Boot will see a massive decrease in revenue.