Green Light for WAG and ABC Deal

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The largest retail pharmacy chain in the U.S., Walgreen Co. (WAG) and Alliance Boots continue to make steady progress to boost their global presence in the prescription drug purchasing space. The regulatory approval for the companies’ equity investment deal in AmerisourceBergen Corporation (ABC), a major pharmaceutical service company in North America, is seen as yet more good news for investors after the positive events last week.

Investors and competitors alike have been looking forward to the regulatory clearance of the 10-year old deal between Walgreens and AmerisourceBergen, effective Sep 1, 2013. The approval boosted market sentiments as shares of Walgreens rose 1.58% on the day of the announcement. On the other hand, other players in the market such as CVS Caremark (CVS) are likely to scrutinize its branded and generic drug purchasing network and contemplate strategic possibilities.  

AmerisourceBergen will replace Walgreens’ current pharmaceutical distributor Cardinal Health (CAH) as the existing contract is set to expire in Aug 2013. AmerisourceBergen already supplies specialty drugs to Walgreens.

Following the clearance, the company and Alliance Boots have the right to purchase a minority stake of 7% in AmerisourceBergen in the open market and another 16% equity stake in 2016 and 2017. As per the approval, the equity stake is exercisable up to 25% in aggregate, after accounting for the stock buyback activity of AmerisourceBergen.

Walgreens’ long-term deal with AmerisourceBergen is expected to create a kingpin in the prescription drug purchasing space. Walgreens is optimistic about the financial and operational benefits from the AmerisourceBergen deal for fiscal 2014 with margin expansion and bottom-line accretion.

Walgreens continues to gain positive momentum on the back of strategic deals. Currently, the stock carries a Zacks Rank #3 (Hold).

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