The Real Deal on Wall Street: Here is Why Walgreen's Deal is Dreadful
I purposely let the dust settle on the Walgreen (NYSE: WAG) / Alliance Boots "partnership" news before writing a note to the Benzinga faithful, opting to think a little creatively. What I wanted to determine was whether this is a traditional, poorly-thought-out deal - or a great combination that the market had no business reacting negatively to. I'm going to side with Mr. Market on this one, but not for the run of the mill reasons.
Each company has a long history in its respective markets, potentially causing management teams to lock horns. Both companies have an interest in making this deal work - obviously.
For Walgreen, it must deliver near its EPS targets as it is levering up its balance sheet to make the deal happen. For Alliance Boots, it wants to sell the remaining 55% stake at a richer price than the first stake to Walgreen in three years. Still, I sense that these companies are set in their ways, which places shareholders at risk from stagnant execution preventing full deal synergies.
Bigger is Not Always Better
Walgreen management certainly made it known that the investment banking team it hired projects quite a lofty amount on deal synergies. These are two businesses, however, that will have to integrate sensitive data (patients) - plus cross their fingers and hope a U.S. shopper will want to purchase a can of soup labeled "Boots" or something along those lines (being sarcastic, but you get the drift).
Furthermore, Walgreen is basically handing over its international strategy to the people at Alliance Boots as opposed to formulating its own game plan. On Twitter, fire this at @BrianSozzi… #IntegrationRisk
Walgreen Did not Read "Art of War" Walgreen showed no strength to Alliance Boots (transaction-specifics) and competitors in the U.S. marketplace by trying to paper over, using billions of dollars no less, the mismanagement of the Express Scripts (NASDAQ: ESRX) account. I expect competitors to use the integration window to really ramp efforts to gain market share, with the winner/lead dog being CVS Corp. (NYSE: CVS).
Walgreen surprised me, given everything that was thrown onto the plates of shareholders, by announcing a dividend increase. I am not only concerned about whether this is the last dividend increase from the company for an extended period, but if it's sustainable when imagining the balance sheet in the future - and assuming there is downside risk to deal synergies.
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