Will Walgreens Relocate to Europe?

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Despite majority of its exposure gained in the U.S., leading drug retailer Walgreen Co. (WAG) has been pressurized by an influential group of its investors including Goldman Sachs (GS) and hedge funds Jana Partners, Corvex and Och-Ziff to relocate itself to Europe, according to a Financial Times article. Per the source, following Walgreens’ initial refusal to consider relocation, these investors requested the Chicago-based retail pharmacy chain to reconsider the whole matter as a strategy to reduce its corporate tax burden.

According to these investors who own almost 5% stake in Walgreens, this tactic, known as tax inversion, will be beneficial for Walgreens in drastically reducing its taxable income which it has to pay in the U.S. – a country with one of the top corporate tax rates in the world. They requested Walgreens to use its impending $16 billion acquisition of Switzerland-based pharmacy-led health and beauty group Alliance Boots GmbH to re-domicile its tax base in Europe.

Notably, in Aug 2012, Walgreens acquired a 45% equity interest in Alliance Boots GmbH for $6.7 billion and is expected to purchase the remaining 55% over a six-month period beginning Feb 2, 2015 for an approximate value of $9.5 billion in cash and stock.  

According to the source, last month, analysts at UBS noted that while the corporate tax rate for Walgreens was as high as 37.5%, the same was a mere 20% for Alliance Boots. As a result, with application of the inversion strategy, Walgreens may be able to increase its earnings per share by 75%.

However, from Walgreens’ point of view, the decision may not remain as easy as it seems, taking into consideration the political pressure it would face while relocating.

In the last reported quarter, Walgreens opened/acquired 28 stores. As of Feb 28, 2014, the company operated in 8,681 locations in 50 states, the District of Columbia, Puerto Rico and Guam and the U.S. Virgin Islands, including 8,210 drugstores (138 more compared with the year-ago period). The company also operates worksite health and wellness centers, infusion and respiratory service facilities, specialty pharmacies, mail service facilities, e-commerce business and Take Care Health Systems.

Walgreens currently has a Zacks Rank #3 (Hold). While we choose to remain on the sidelines regarding WAG at present, drug retailers like Rite Aid Corp. (RAD) and CVS Caremark Corp. (CVS) are worth considering. While Rite Aid holds a Zacks Rank #1 (Strong Buy), CVS Caremark carries a Zacks Rank #2 (Buy).

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