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Yet Another Buy for Walgreen

Zacks Equity Research

Despite several recent headwinds, Walgreen (WAG) has been successful in maintaining its nonstop shopping spree. Following a gigantic $6.7 billion merger with Alliance Boots, this leading retail pharmacy chain completed its acquisition of a mid-South US-based regional drugstore chain from Stephen L. LaFrance Holdings Inc. for $438 million.

The string of mergers and acquisitions signifies the company’s reliance on the inherent quality of each asset and superior demographics, which it believes would drive solid return on investments going forward.

Earlier in July, Walgreen entered into a purchase agreement to acquire this US drug pharmacy chain in order to get a hold of its 144 drug stores located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee. These stores currently operate under brands like USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse stores. Further, the acquisition also includes corporate offices and one distribution center located in Pine Bluff, Arkansas.

Walgreen believes that this acquisition will help expand its business in several key regions of the nation but rules out any material impact on its fiscal 2012 earnings per share ('EPS'). It is noteworthy that the regional drugstore chain delivered sales of $825 million in fiscal 2011.

To offset the impact of the Express Scripts (ESRX) contract loss, Walgreen is currently concentrating on several strategic steps to drive growth. In August this year, the company entered into a strategic partnership with a global international pharmacy-led health and beauty group Alliance Boots GmbH, in which it acquired a 45% stake for $6.7 billion. The company also has the option to attain 100% ownership over the next three years for an approximate value of $9.5 billion in cash and stock.

In May, Walgreen completed the acquisition of certain assets of BioScrip's (BIOS) community specialty pharmacies and centralized specialty and mail service pharmacy businesses that include a national network with 30 locations in 16 states across the US and the District of Columbia, primarily serving HIV, oncology and transplant patients.

At the same time, Walgreen also acquired certain assets of BioScrip's traditional mail service pharmacy business that dispenses prescriptions for drugstore.com, which was acquired by Walgreen in June 2011.

We are optimistic about the latest development in which, Walgreen, after a long waiting period of 7 months, has finally reached a settlement with Express Scripts. The Express Scripts contract loss was a blow to Walgreen, as the earlier contract used to contribute a significant part to its sales (12.6% of total prescriptions filled in August 2011). As a result, the company’s results have been dismal since the beginning of 2012.

We expect these new ventures to boost Walgreen’s growth going forward. Nevertheless, it remains to be seen if these measures can neutralize the headwinds related to the Express Scripts contract.

However, we cannot dismiss the chances of failure, as only time can tell whether the amounts invested in these acquisitions and mergers were fruitful. Walgreen has also been affected over the past few quarters by high unemployment levels and lower discretionary spending.

Currently, Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have a Neutral recommendation on the stock over the long term.

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