Walgreen Set To Go Back To Being CVS

| About: Walgreens Boots (WBA)
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Summary

CEO Greg Wasson isn't retiring, he was pushed out by Alliance Boots chair Stefano Pessina.

Makeovers of Walgreens stores may end as a result, with more focus on supply chains and operations.

Expect a tax inversion to boost the stock price.

The sudden resignation of CEO Greg Wasson, in what amounts to a takeover of Walgreen (WAG) by the European chain it's buying, Alliance Boots, deals a death blow to the ongoing makeover of the company.

Wasson was trying to turn Walgreen outlets into "wellness centers," with lifestyle services and coffee bars that would cause people to spend more time in stores while waiting for prescriptions to be filled or for appointments at its in-store clinics. This was in contrast with rival CVS (NYSE:CVS), which has kept on its convenience store trappings while opening clinics at a faster rate.

But Crain's Chicago Business reports that activist investors whose confidence helped fund the deal, like Jana Partners, preferred the more traditional drug store style of Alliance Boots chairman Stefano Pessina, who built his company with a series of acquisitions aimed at distribution. Most stories call Wasson's move a "retirement," and were carefully crafted by the company itself. (Their wording is nearly identical.)

Pessina, 73, is a brassy Italian billionaire who speaks regularly at top business forums, which probably also appealed to the activists. Members of Pessina's team took top jobs at Walgreen last summer in the run-up to this month's final vote on the $15.3 million merger. Pessina will own 16% of the combined company after the merger is complete.

Soon after Alliance Boots took over most of the Walgreens executive suite this summer the company floated the idea of moving its official headquarters to Europe in a tax inversion. That idea was dropped after wide scale protests, collapsing the stock price from $72 to $59, but it is likely on the table again, given a Congress more favorable to business interests.

The market's reaction to Wasson's leaving has been positive, with the stock up 2% overnight, to $69.50. The company's financial results, it should be noted, have lately been going nowhere fast, with sales up just 5% in the latest fiscal year, to $76.4 billion (that's more than Amazon.com's (NASDAQ:AMZN) most recent fiscal year), and a profit of about $1.9 billion, about 2.5% of sales.

Investors should expect a lot more Wall Street and a lot less Main Street from Pessina's company, and while he's not taking over the CEO chair this will be Pessina's company going forward. If the past is prologue, expect Pessina to go after companies that supply Walgreen with products and services, in order to increase margins through more control of the supply chain.

With a market cap of nearly $70 billion on $76 billion in sales, Walgreen is fully valued in retail terms, and is worth more based on sales than CVS, which had $126.7 billion in sales last year and has a market value of $104 billion. That stock opens at $90.11/share today and is up 35% over the last year, against a 20% gain for WAG. That company is also considering a dividend increase.

I made some money on Walgreen under Wasson, booking a small profit in October after buying into it in late 2013 and booking almost $100 in dividends as well. Pessina's company may do as well. It will certainly be flashier, and possibly more controversial.

Disclosure: The author is long AMZN.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.