Recently, Walgreen (WAG) completed the acquisition of New York-based Duane Reade Holdings. The deal involves all 258 Duane Reade stores in New York, its corporate office and two distribution centers.
Earlier, in February 2010, Walgreen announced its decision to acquire the drugstore chain for a total enterprise value of $1.075 billion, including debt. Walgreens has the required funds to complete the purchase with its existing cash balance. At the end of the second quarter of fiscal 2010, the company had $2.5 billion in cash and cash equivalents.
Duane Reade reported sales of $1.84 billion in 2009. Following the completion of the acquisition, Walgreen announced its intention to pay back about $457 million of the debt burden of Duane Reade Holdings.
Although Walgreens operates about 7,500 stores, its presence in New York is not strong. Following the transaction, which includes 257 Duane Reade stores located in the New York City metropolitan area, Walgreen will become one of the leading players in the largest drugstore market in the US.
This transaction is expected to be dilutive to earnings per share in the first 12 months after closing and accretive in the next 12 months and thereafter. Synergies of $120-$130 million are expected after 3 years of closing the transaction.
In October 2008, Walgreens began implementing a new three-pronged strategy to achieve double-digit growth by 2011. They include leveraging the existing store network, improving experience for shoppers and patients and targeting $1 billion of annual cost reductions by fiscal 2011.
We believe that Walgreens has the requisite infrastructure and focused strategy to tide over the current economic crisis. The recently announced health care reform in the U.S. will eventually include another 32 million people in the insurance net. This is likely to increase the prescription volume manifold, which should help boost the top-line. We are “Neutral” on the stock.
Read the full analyst report on “WAG”
Zacks Investment Research
