1
Vote Against Approval of Issuance of Shares (Item 2)
to Complete Acquisition of Alliance Boots
at December 29, 2014 Special Meeting
of Walgreen Shareholders
3
CEO Wasson out, AB’s Pessina in! What Just Happened?
- 2 weeks before vote Wasson suddenly announces intent to step down, with no successor in place and no clear succession plan announced.
- AB’s Pessina will assume interim-CEO position.
- Two chief architects of this deal from WAG’s side now gone: CFO Miquelon and CEO Wasson.
- After 2.5 years of partnership and promises of smooth merger, shareholders are to vote with no idea who will lead the challenging integration.
- Where was the board during this coup? It has remained silent, as it did during this deal’s other twists and turns.
4
Paying for the privilege of being taken over.
- An original deal, not even billed as a ‘merger of equals,’ but an acquisition with a control premium, now grants AB control over WAG’s operations plus a takeover premium.
- The “blended management team” is now dominated by Alliance Boots executives.
- If WAG’s management needed overhauling, there are cheaper ways to do this than a $24 billion deal.
- History has repeated itself. Pessina used the 2005 merger between his company, Alliance UniChem, and the Boots Group to gain control of the combined company.
- Sets up specter of competing power bases - Nottingham, Chicago
5
Why vote AGAINST the full takeover of AB?
- Unnecessary –The existing partnership and joint venture already achieve most, if not all, realizable synergies. There is little need for the $24 billion second step.
- Overvalued – The premium is exceedingly rich and provides valuation multiples far above comparables.
- Strategically risky – Shareholders face heightened exposure to underperforming AB business amid weak Euro markets.
- Poorly negotiated – The cost of the acquisition has risen 28% since announced, investor vote delayed 2+ years.
- Lacks credible execution – Management has reduced combined FY2016 EBIT 20% and has failed to give shareholders needed disclosure.
6
Alliance Boots: Looking under the hood shows sand in its growth engine
- Majority owned by Stefano Pessina and KKR
- AB is primarily a European drug wholesaler
– Source of revenue:
Europe > 90% of total
Wholesaling = 67% of total
- Limited organic growth potential: Retail pharmacy chains are prohibited in most of Europe, making vertical integration impossible.
- Flat sales for the foreseeable future: The firm faces shrinking drug spends in many of its primary wholesaling markets, and increased retail competition in the UK. In 2013, wholesale profits were down and retail sales were flat.
- Global growth platform untested: AB’s investments in China and Latin American are new, small and risky.
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Deal Overview: Selected Timeline of Walgreen’s Complex and Unstable Transaction
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Deal Overview: The unusual two-step business combination failed to give investors timely vote
| Transaction | Date | Deal Term | Consideration | Governance |
| Joint venture, | Aug 2012 | “Step 1” | $4.0B cash | Pessina & Murphy |
| equity swap | 83.4 M shares | (KKR) join WAG’s | ||
| (45% stake in | board; hold 7.7% and | |||
| AB) | ~0.7% respectively | |||
| Full Acquisition | Pending | “Step 2” | $4.9B cash | ~16 to 20% ownership |
| 144 M shares | Pessina Exec Vice | |||
| (AB’s Debt) | Chair | |||
| 2012 Projections | 2014 Realities | |||||
| 2016 operating profit | $ | 9 - $9.5B | $ | 7.2 | B | |
| Combined debt | $ | 11 | B | $ | 17.9 | B |
| Total cost of deal | $ | 28.9 | B | $ | 35.7 | B |
| EV/EBITDA (2015) | 11.5 | x | 14.8 | x | ||
| AB’s annual operating | 9 | % | 4.4 | % | ||
| income growth | ||||||
| 10 | |
| Deal Overview: | |
| Market reaction to deal ambivalent |
Walgreen’s share price has benefitted from a bull market, and has tracked a similar trajectory to close competitor CVS since the transaction was announced.
11
Acquisition Unnecessary: Paying for Pessina’s Empire Building, not for Synergies
| Synergies to date are procurement from purchasing JV. | ||
| o |
Probably a “majority” of procurement synergies can occur without second-step, according to Walgreen CFO.
| |
| Top two competitors have opted for the capital light approach of procurement joint ventures. | ||
| o | CVS JV with Cardinal |
| o |
Rite Aid JV with McKesson
|
- WAG has similar deal with AmerisourceBergen & AB - a better way to test the waters of global consolidation.
12
Acquisition Overvalued: Excessive premium the road to buyer’s remorse
- Debt plus equity of second step ~$24 bn
- Consideration offers up to a 93% premium above fair value of AB’s equity under second step.
- Buffett’s first law of capital allocation: “what is smart at one price is dumb at another”
WAG is Paying EV/EBITDA Forward Multiple for 13
Step 2 Far in Excess of Comparables
Mid-point valuations of fairness opinions provided by Goldman Sachs and Lazard compared to second step transaction cost based on consideration valued at $13.96 billion (based on Aug. 11. 2014) and expected debt.
WAG is Paying up to a 93% Premium for Remaining Equity of AB 14
OVERVALUED: COST OF STEP 2 EQUITY
Blue = Cost to WAG shareholders Red = Goldman Sachs Green = Lazard
Due to AB’s privately-held status, the premium over and above market value is not available from per-share data. Using the midpoint valuations performed by Lazard and Goldman Sachs pursuant to the three valuation methodologies, we illustrate the takeout premiums using a second-step consideration value of $13.96 billion (based on Aug. 11. 2014 valuation date).
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The Deal is Risky: Threats to Alliance Boots Performance and Synergies
| Continuing Headwinds from Europe | ||
|
Austerity policies driving down drug prices, set to remain in place.
| ||
| Timing, Likelihood of Synergies Uncertain | ||
| Procurement synergies are back-loaded. | ||
| Top-line synergies promised but appear unlikely. | ||
16
The Deal is Risky: Doubtful beauty synergies make deal look even uglier
| Boots’ beauty strategy faces challenges in US | ||
| Differences in US and UK markets make importing Boots’ beauty success unlikely. | ||
|
US customers resist drugstores for beauty, favor high-end specialty retailers.
| ||
| Margins are slashed for Boots products in US | ||
| Boots products cost up to 55 percent less at Walgreen. | ||
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The Deal is Risky: The long line of British failure in America
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Acquisition poorly negotiated: Benefits AB’s Sellers
- Issue up to 25% in undervalued stock currency without “ceiling” protection for WAG shareholders on two-year option;
- Yet concede downside “floor” protection for AB holders.
WAG Historical EV/EBITDA Trading
Acquisition poorly negotiated: Long-term
shareholder voices effectively silenced
| Failed to protect shareholder franchise by: | |||
| o | Avoiding shareholder vote for 2 years: | ||
| o |
Shareholders should have more say…“The way WAG has structured [this deal] treats shareholders very poorly…Shareholders have no real say … since the minimum purchase price ...is essentially set now even though there is no shareholder vote” - Barclays Equity Research, 20 June 2012 | ||
| o |
No provision for a vote of the disinterested shares in Second Step, when Pessina already holds 7% of voting shares
|
- Failure to establish independent committee to renegotiate price as AB’s performance slips and risk increases.
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Lacks Credible Execution: Acquisition comes at time of strategic missteps and internal acrimony.
| WAG shocked market with $2 billion forecast reduction in August; 20% reduction in FY2016 EBIT goal for AB/WAG, stemming from: | ||
| Internal miscalculation of generic pricing and Medicare Part D reimbursement rates | ||
|
Underperformance in both AB and WAG’s core business Ï AB growing at half the rate expected in 2012
| ||
|
Controversy over the departure of CFO and other top-ranking executives
| ||
| Increasing pressure from hedge funds to prop up stock: | ||
| Undertake a tax inversion | ||
| Pursue share buybacks | ||
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Lacks Credible Execution: Disclosure leaves shareholders in dark on critical issues
- How well the board negotiated, oversaw original 2012 agreement and its decision to proceed without key deal provisions, shareholder vote.
- The basis of the original financial fairness opinions in 2012 and the extent to which they would have supported what is now a more expensive deal for a weaker performing business.
- The degree to which hedge funds engaged and influenced the board and/or key management, and the board’s decision to acquiesce to short-term activist demands.
22
Jana settlement further clouds interests of long-term shareholders
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Summary: Why vote AGAINST this deal?
- Unnecessary
- Overvalued
- Strategically Risky
- Poorly negotiated
- Lacks credible execution
Appendix
Trend to Procurement Joint Ventures
