Walgreens To Sell Distribution Unit To AmerisourceBergen For $6.5B; Shares Gain

Walgreens Boots Alliance Inc. has struck a $6.5 billion cash and stock deal to sell its Alliance Healthcare distribution businesses to AmerisourceBergen Corp., as the US drugstore chain seeks to focus on its core retail pharmacy business.

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Walgreens (WBA) shares were up 2.3% in Thursday’s pre-market trading after closing 4.5% higher yesterday. AmerisourceBergen stock jumped 8.7% on Wednesday as the US drug wholesaler announced that the transaction will consist of $6.275 billion in cash and 2 million shares of its common stock. With a 30% holding, Walgreens Boots is the largest shareholder of AmerisourceBergen.

Additionally, the two companies have agreed to extend and expand their commercial agreements to create incremental growth and carry out synergies and efficiencies. Their US distribution agreement will be extended by three years until 2029, which also includes a commitment to pursue additional opportunities in sourcing and distribution. Furthermore, Alliance Healthcare UK will stay the distribution partner of Walgreens Boots until 2031. The companies expect their US strategic partnership to yield annual run-rate synergies in the fourth year of at least $150 million, which will be shared equally.

“This strategic agreement with AmerisourceBergen, which we consider to be the world’s leading pharmaceutical wholesaler, is a very positive development for the two companies. It is a logical step following the success of our long-term strategic relationship with AmerisourceBergen which has been a strong and trusted partner since 2013,” Walgreens Boots CEO Stefano Pessina said. “The transaction will fuel higher future investments to grow and transform our core retail pharmacy and healthcare businesses, and is EPS accretive long-term for Walgreens Boots Alliance.”

The drugstore chain operator forecasted that the transaction will be slightly dilutive in the current financial year. Walgreens’ Alliance Healthcare businesses are expected to post FY2021 adjusted EBITDA in the range of $575 million to $580 million. In FY20, the Alliance business generated $19 billion in revenue and $540 million of adjusted EBITDA.

The deal, which is expected to close by AmerisourceBergen’s (ABC) fiscal year-end 2021, excludes Walgreens Boots Alliance’s operations in China, Italy and Germany.

Truist analyst David S. Macdonald this week lifted WBA’s price target to $44 (2.2% upside potential) from $40, as he argues that the sector is bound to benefit from tailwinds, including site of service redirection, a boost in value-based care services, and a focus on integrated care delivery.

MacDonald also sees room for a flurry of mergers and acquisitions as cash flows of healthcare services companies remain robust and valuations are attractive. However, with shares down almost 30% over the past year, the analyst reiterated a Hold rating on the stock for now. (See Walgreens stock analysis on TipRanks).

The rest of the Street is firmly in line with Truist’s outlook. The Hold analyst consensus shows 6 Hold ratings versus 1 Sell rating. Looking ahead, the average price target of $41.20 implies 4.3% downside potential from current levels.