June 21, 2012

Alliance Boots boss Pessina talks Walgreens

Stefano Pessina, Executive Chairman Alliance Boots (photo: Alliance Boots)
Stefano Pessina: "This deal, creating a global company, has never been done before"
The $6.7bn cash and stock deal between Walgreen Co and Alliance Boots, announced on Tuesday, is one that simply had to happen.

Pending regulatory approval, the leading US drugstore chain will gain a 45 per cent stake in the UK's foremost pharmaceutical-based retailer as per September 1.

Stefano Pessina, co-owner and Executive Chairman of Alliance Boots, is the born dealmaker, and the billionaire Italian has never made any bones about his wish to create the world's largest health & beauty company.

Also, whatever official noises may be made by both parties to the contrary, Pessina was probably under pressure to at least offer co-investor KKR a medium-term exit option.

Despite the obvious efficiency and synergy increases Pessina has achieved at Alliance Boots, the fact remains that the joint-venture was entered into at the top of a market.

Unluckily, the resultant debt mountain has to be repaid through a world banking crisis, the worst UK recession in living memory, and a Europe in economic turmoil.

Increased exposure to Europe
Should Walgreens gain full control of Alliance Boots via the second tranche of the deal to be completed in three years' time, one media source computes that KKR could realise more than double its original stake. This would reduce KKR's exposure to troublesome Europe while drastically increasing that of Walgreens.

A number of questions remain: Given the underwhelming nature of many Walgreens stores in the US, is this expensive deal really going to help the company restore declining same-store sales on its home market?

Also, will the deal plunge both companies into ungovernable complexity? After all, the statistics are against it working (think Daimler-Chrysler). Already Alliance Boots is a vast and complex organisation whose current stature is primarily the result of big mergers and takeovers.

It is easy for senior executives to add figures together at the top, but who is prepared to do the dirty work, roll up their sleeves, and make far-flung business empires function in a customer-centric and employee-friendly way?

Finally, given Mr. Pessina's propensity for mega deals, when will he make his next big global move?


Mr. Pessina, with the Walgreens deal, you have achieved your goal of creating the world's leading drugstore and pharmacy company. What does this mean to you?

I am very excited about what we have announced -- something new, that nobody has done before. I have been saying for a long time that the healthcare industry needs a global player, and working for a long time to find the right partner to make this vision a reality.

Greg Wasson, CEO of Walgreens, and I share the belief that creating world’s first pharmacy-led health and wellbeing group is the best for the industry as a whole, as well as for our own stakeholders. It will allow us to have breadth, scale and capability to address the changing needs of patients, suppliers, pharmacists and manufacturers all over the world.

We will benefit from further development in our existing markets, but also and especially from becoming the new model, the new point of reference in new and emerging markets as they develop.

How many shares did you sell to Walgreens and how many do you still have?

Walgreens is investing $6.7bn in cash and stock now, to acquire a 45 per cent equity interest in Alliance Boots. Then, in around 3 years’ time, they have the option to proceed to a full combination and acquire the remaining 55 per cent. Since they are paying in cash and shares, and I am taking only shares, I will become their largest shareholder.

Also, as part of our agreement, I will become a board member of Walgreens. Greg Wasson will also join the Alliance Boots Board of Directors.

How big is the risk that regulatory authorities will fail to authorise the deal?

The transaction is, of course, subject to some regulatory approvals, but we believe that these should not be a challenge. After all, there is no geographical overlap at all between us.

In our recent interview you said that you'll find a solution which enables Alliance Boots to keep growing even after your exit. Have we now reached that solution, and which side engineered the deal?

This is not an exit at all for me! I am taking exclusively shares in return for the sale of my stake in Alliance Boots. This tells you without a doubt that I intend to be actively involved in the work we have ahead of us to deliver our synergies, leverage our scale and enter new markets where we can grow significantly.

Also, for the next two and a half years, we will continue to run the companies separately, so we will be busy to deliver growth and generate cash to reduce our borrowings and invest in the company. In the meantime, we will also be preparing the best way to integrate the two companies. This will make sure we are in the best position for the full merger.

With regards to the deal, as I said, Greg Wasson and I see very much eye to eye on the concept of a global company in our industry, so many things were happening quite naturally as our conversations over the last 18 months were progressing. We share the vision, and I have been thinking about creating a truly global enterprise for ten years -- and all of this allowed us to deliver something completely new, that nobody had done before.

Analysts are sceptical concerning the deal. Can you explain why?

This is an innovative and, to some, an unexpected deal, and the market needs time to fully digest and understand it. I believe that this is a great deal: we have strong and immediate synergies to exploit, but also a huge long-term potential for growth. In fact, this partnership is all about growth.

We experienced similar initial reactions six years when we merged Alliance Unichem with Boots, and even more when we took the company private. It is often the case of slight uncertainty with early reactions. I believe this is a great deal for Walgreens and for us, and it will bring much profitable growth for the benefit of all stakeholders in the future.

If Walgreens buys the rest of Alliance Boots in a few years, will the Boots brand disappear?

Absolutely not! Quite the opposite -- the Boots brand (and Walgreens too) will continue to thrive. The partnership gives us access to the largest pharmacy network in the largest market in the world, Walgreens, and we will make our product offering available in their stores. Products like No7, Boots Laboratories, Botanics will be available to the American consumer on a large scale.

Then, also thanks to the scale and the opportunities in emerging markets, the brand will enjoy even more internationalisation.

You also said last time we spoke that you are not interested in the German drugstore market. Does the deal change your opinion on this, and what does it mean for the German pharmacy market?

I’ve not changed my mind since we last spoke. This deal about creating a global company, something that has never been done before, and I believe our employees, suppliers, independent customers, and manufacturers all will benefit from it.

In terms of the German market, we will be able to deploy here and elsewhere some of the shared best practice: for example, Walgreens have developed some innovative community pharmacy services that we could adapt to some of our European markets for the benefit of independent pharmacists, consumers and patients.

Related article in German: Lebensmittel Zeitung, 20.06.2012, by Martin Mehringer

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