On Tuesday morning, Walgreen (WAG) had a very busy set of announcements with Q312 earnings, a dividend boost, and more importantly the purchase of 45% of Alliance Boots for $6.7B. In reaction, the stock suffered a decline of nearly 6% on a day when the stock market rose roughly 1%. Apparently the market wasn't very happy with some of the announcements. Let's review the details:
The company announced a deal to buy 45% of Alliance Boots for $6.7B. The deal is expected to be accretive by $0.23 to $0.27 in the first year following completion of the deal.
Alliance Boots is a leading international, pharmacy-led health and beauty group delivering a range of products and service to customers. In essence, the company is a leading UK pharmacy providing Walgreens with immediate exposure and expansion plans in other European countries. Most investors will question such a bold move into the struggling continent.
The company has 3,330 stores compared to the nearly 8,000 for Walgreens. Walgreens has nearly double the revenue, suggesting that Alliance Boots has plenty of growth opportunity across the rest of Europe.
One key component of the deal is that Walgreen will pay $4B in cash and only $2.7B in stock. The deal will require a $3.5B loan that will allow the company to take advantage of the low interest rate environment. With the considerable cash flow available to the company after the deal, the loan can be paid off in no time.
Some of the highlights of the combined companies:
- The global leader in pharmacy-led, health and wellbeing retail with over 11,000 stores in 12 countries.
- The largest global pharmaceutical wholesale and distribution network with over 370 distribution centers delivering to more than 170,000 pharmacies, doctors, health centers and hospitals in 21 countries.
- The world's largest purchaser of prescription drugs and many other health and well-being products.
The company announced a 22% hike in the dividend to 27.5 cents per share payable on Sept. 12, 2012. This makes an incredible 319 straight quarters of dividends and an increased dividend for 37 consecutive years. The compounded annual growth rate over the last five years sits at nearly 24%.
While the dividend news would've normally been bullish in this market, the earnings and "questioned" deal led to the stock decline.
The company announced earnings that were basically inline with expectations. The numbers though were down from last year, highlighting the weakness in the sector. The company, however, remains a huge cash flow machine. That ability to put the cash to use was likely a main thrust for this deal.
While not a hot growth company anymore, the tepid results should've been expected. The company still generated enough cash in the first nine months to pay for this deal, no matter whether earnings were down from last year.
Below are some of the highlights from the earnings report.
- Net earnings for the third quarter were $537 million, a 10.8 percent decrease from $603 million in the same quarter a year ago.
- Net earnings per diluted share for the quarter decreased 4.9 percent to 62 cents, compared with 65 cents per diluted share in the year-ago quarter.
- Operating cash flow reached a record $1.9 billion in third quarter and a record $3.7 billion through the first nine months of fiscal year.
The large drop of the stock price was most likely due to the markets displeasure with buying a European company. This article by Kraken highlights the opinion of the bears.
The company only paid roughly 6.2x EBITDA. Combine this number with the fact that cheap cash will be used to fund the purchase price and investors should focus more on the $0.25 of accretive earnings that this deal provides. Oh, and don't forget the dividend will now yield more than 3%.
These facts suggest the fear is overdone, though any large deal can always provide unexpected problems.
Additional disclosure: Please consult your financial advisor before making any investment decisions.