Recently, Walgreen (WAG) decided to acquire New York-based drugstore chain Duane Reade Holdings for a total enterprise value of $1.075 billion, including debt.
The transaction, expected to close in the current fiscal year (ending Aug 31), is yet to receive regulatory approvals. Duane Reade had unaudited net sales of $1.8 billion for the 12-month period ending Dec 26, 2009.
Walgreens will fund the purchase with its existing cash balance. At the end of the first quarter of fiscal 2010, the company had $2.5 billion in cash and cash equivalents.
Although Walgreens operates 7,162 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.
Walgreens expects the transaction to be dilutive to its earnings per share in the first 12 months after closing and accretive in the next 12 months and thereafter. The company expects to achieve synergies of $120-$130 million after three 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 current US government’s agenda of reforming the healthcare system will impact the company on its margin and reimbursement front. However, the possible inclusion of about 47 million uninsured people into the insurance net will increase the prescription volume manifold, which should help boost the top-line. We are “Neutral” on the stock.
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