Shares of Walgreen Co. hit a 20-month low Wednesday, extending a slide that started a day earlier when the drugstore operator said it will spend $6.7 billion to buy a stake in European health and beauty retailer Alliance Boots.
THE SPARK: Walgreen Co. said Tuesday that it will pay cash and stock for a 45 percent stake in Alliance Boots, which runs the largest drugstore chain in the United Kingdom. Walgreen, based in Deerfield, Ill., also has an option to buy the rest of the company in about three years.
Company leaders said they've been working on the deal for 18 months, and it comes with some powerful, global growth opportunities.
THE BIG PICTURE: The announcement came the same day Walgreen said its fiscal third-quarter earnings dropped 11 percent to $537 million. The drugstore chain is working through a sales slump prompted largely by its split with pharmacy benefits manager Express Scripts Holding Co., for which it had filled prescriptions.
Walgreen also said Tuesday its board raised its quarterly dividend by 5 cents to 27.5 cents per share.
THE ANALYSIS: Credit Suisse analyst Edward J. Kelly said Walgreen was taking a "huge risk" even though the idea of global diversification makes sense.
"While (Walgreen) remains optimistic on the outlook for U.S. pharmacy, its willingness to pay up for global diversification could indicate that the business is facing deeper structural headwinds," he wrote in a research note.
Citi analyst Deborah Weinswig said in a separate note that U.S. drug retailers have not historically bought international companies, and she said Walgreen's experience in integrating businesses was limited, especially for deals of this size.
"While the transaction creates some global opportunities, we believe it does not resolve (Walgreen's) issues in the U.S.," Weinswig wrote, adding that the deal could become a distraction as the company works to improve that business.
Raymond James analyst John W. Ransom said in another note he held an unfavorable view of the deal initially, in part because of the acquisition premium. But the analyst said the near-term downside is limited given implied future earnings power and a dividend yield that is approaching 4 percent.
The dividend yield is calculated by dividing the annual dividend by the company's stock price.
SHARE ACTION: Walgreen shares fell nearly 6 percent Tuesday to close at $30.09. They 3ropped another 3.8 percent, or $1 to $29.09 in afternoon trading Wednesday. The stock hit a low of $28.53 earlier in the day, its lowest since September 2010.
Company shares traded near $45 per share a year ago, but they started sliding after Walgreen said in June 2011 it would walk away from its Express Scripts contract, which ended last December.