Walgreen may ditch US for Switzerland

The move, known as an inversion, has never been attempted by a major American retailer.

By MSN Money Partner Jul 16, 2014 3:32PM
People walk by a Walgreens in Boston, Mass., on April 30, 2013 (Photo by Wendy Maeda/The Boston Globe via Getty Images)By Paul Ziobro, The Wall Street Journal

Walgreen's (WAG) first pharmacy opened 113 years ago inside a hotel on Chicago's South Side and this year, the chain will derive nearly all its sales and most of its profits from its 8,700 U.S. locations.

But Walgreen is currently thinking about leaving American shores, as part a plan to buy the rest of Alliance Boots GmbH, which operates a U.K. drugstore chain and is based in Switzerland. 

The move could help Walgreen lower its U.S. tax bill saving the company hundreds of millions of dollars a year -- money that wouldn't flow into the U.S. Treasury.

If it goes ahead, it would be an unusual use of the controversial and complex maneuver known as an inversion. While well tested among pharmaceutical and manufacturing companies that earn much of their income overseas or have assets like patents that are held offshore, the move has never been attempted by a major U.S. retailer, according to tax experts.

The maneuver would be a bet on the future. Apart from Alliance Boots' contributions, Walgreen makes all of its money in the U.S. But with the domestic market for drugstores now saturated -- 75 percent of Americans live within five miles of a Walgreen-owned pharmacy -- investors and analysts see faster growth coming from places like China and Latin America.

A full combination with Alliance Boots would mean that roughly a third of Walgreen's profits will come from outside the U.S., according to analysts and investors. Alliance Boots operates 2,500 drugstores in the U.K. out of 3,150 stores globally, and has a wholesale drug distribution business which generates two-thirds of its revenue. In May, it agreed to buy Farmacias Ahumada, which operates more than 1,400 stores in Mexico and Chile.

A tax inversion, which would relocate headquarters to a more tax-friendly country like Switzerland, would ensure that those profits aren't stuck overseas and avoid the tax hit that otherwise would come with bringing the money back to the U.S. Freed up, that cash could be used to buy back shares, pay dividends or reinvest in Walgreen's U.S. stores.

"It would give the group access to those earnings without tax leakage," said Robert Willens, president of Robert Willens LLC, a tax and accounting advisory firm. Profits earned overseas are subject to the 35 percent U.S. corporate tax rate when brought back to the parent company. Switzerland's corporate tax rate is 17.9 percent, including other local taxes, according to KPMG.

Americans for Tax Fairness, a liberal tax reform group, estimates that Walgreen would pay $4 billion less in taxes over the next five years if it does an inversion, based on calculations from UBS AG (UBS), Deutsche Bank AG and JPMorgan Chase (JPM).

Mr. Willens, meanwhile, expects the savings to be about half that since Walgreen would still pay U.S. corporate tax on its U.S. income.

The move wouldn't let Walgreen escape U.S. taxes on the share of profits it generates in the country. Walgreen spokesman Michael Polzin said the company would still pay at least $2 billion a year in federal, state and other taxes. But an inversion would facilitate ways to reduce Uncle Sam's cut through so-called income-shifting transactions. 

Walgreen's U.S. business, for instance, could take on much of the company's debt, and the interest would lower its taxable income at home. Alternatively, the U.S. business could pay a fee to its overseas parent corporation for management services.

Walgreen has an option to buy the rest of Alliance Boots between February and August of next year. Walgreen executives will brief investors in the coming weeks whether the company plans to acquire the remaining stake, how it would structure a deal and where the combined company would be based.

Walgreen executives are leaning toward moving to Switzerland but are concerned possible new legislation from Congress could become a roadblock, according to a person familiar with their thinking. Congress is considering passing a bill to make inversions more difficult.

Under terms of the original deal, Walgreen would pay around $16 billion, excluding debt, for the 55 percent of Alliance Boots it doesn't already own. It bought a 45 percent stake in 2012 for about $6.7 billion.

A group of prominent investors including activist hedge fund Jana Partners LLC is pressing Walgreen to relocate abroad to save on its tax bill. After long resisting the idea, Walgreen Chief Executive Greg Wasson said for the first time on a conference call last month that the company is looking at relocating outside the U.S. In response to an analyst's question about inversions, Mr. Wasson said the company is looking at the tax structure and "what the structure could do as far as our effective tax rate."

"We're going to do what's in the best long-term interest of our shareholders, customers and employees," Mr. Polzin, the Walgreen spokesman, said.

A spokeswoman for Alliance Boots declined to comment.

Inversions involve buying an overseas company and then relocating outside the U.S. Shareholders of the acquired foreign company must receive at least 20 percent of the combined company's equity for the tax benefits to kick in.

There has been a recent rash of such deals by health-care companies like Medtronic (MDT), which is seeking to relocate headquarters to Ireland through a $42.9 billion acquisition of medical devices rival Covidien (COV). AbbVie (ABBV) this week is making a similar play for Dublin-based Shire (SHPG) at $53.6 billion.

Retailers are just now getting pulled in. On July 2, pregnancy-wear retailer Destination Maternity (DEST) said it wants to buy Mothercare PLC for $453 million and relocate its headquarters to the U.K., where Mothercare is based. Philadelphia-based Destination Maternity argues the deal would give it a more global footprint and would protect Mothercare's earnings from getting caught in the U.S. tax net.

Mothercare's board rejected the deal, saying it undervalues the company.

In 2009, doughnut chain Tim Hortons (THI) did a so-called self-inversion and relocated its headquarters from the U.S. to Canada, where it did most of its business, trading shares between two subsidiaries to facilitate the move.

Minimizing taxes wasn't part of the formula when Walgreen bought its first stake in Alliance Boots in 2012. Mr. Wasson touted the deal as one that would give Walgreen greater global exposure as domestic sales were slack, and that the combined companies would have greater heft when it came to purchasing generic drugs.

Analysts didn't press for details on the tax structure during a conference call to discuss the deal on the day it was announced. But the issue picked up steam late last year as investors started pushing for a move.

Walgreen dismissed the idea as recently as March, when Mr. Wasson, the chief executive, said the company wasn't considering an inversion.

But the following month, investors including hedge funds Jana Partners, Corvex Management LP and Och-Ziff Capital Management (OZM) met with Mr. Wasson, Walgreen Chief Financial Officer Wade Miquelon and Alliance Boots Chairman Stefano Pessina in Paris to ask them to reconsider. Walgreen warmed up to the idea soon afterward, culminating in Mr. Wasson's declaration on last month's earnings call that the company is "looking at all and everything."

"The likelihood went up dramatically," Jefferies analyst Mark Wiltamuth said of the odds of an inversion for Walgreen. "The only reason you consider timing and structure is because you are clearing the path for conversion."

—Dana Cimilluca contributed to this article.

Jul 16, 2014 4:42PM




Jul 16, 2014 4:15PM
Why are people upset at Walgreens, as it's a smart business move.  The U.S. has the highest corporate tax rate in the world.  Our pathetic leaders in D.C. can't think of anything to spur on our economy, so they just keep taxing.
Jul 16, 2014 4:02PM

There will be many, many more.  Why pay US tax rates if you can move elsewhere?  Capital and Business will move where it is treated best.  The more you tax business, the less of it you will have.  The democrats obviously want less business.  As business moves overseas, we will have less jobs, and create less wealth.   I suppose that fits with their wealth redistribution plans.  Everyone will be poorer and have to live on the government plantation. 

Obamanomics is not the answer.

Jul 16, 2014 3:53PM
Thanks a lot, Barack!

Medtronic (a medical device company with a market cap of over $63 billion) is leaving for Ireland because of the medical device tax included in Obamacare.

Walgreens could save $4 billion in taxes over 5 years by moving to Switzerland.

Can you blame them?

Companies are fleeing excessive taxes and regulations...How many jobs are we losing in the process?
Jul 16, 2014 4:58PM
Interesting... in KC, a swiss company is purchasing Russell Stover Candies.  I guess we'll soon be kissing those corporate taxes goodbye too!
Jul 16, 2014 4:22PM

They're not doing anything illegal, what's the problem. Maybe it would be smart to make America more competitive by lowering the tax rate and making the US a more business friendly country. We are moving in the opposite direction, more regulations, higher taxes ends up being higher prices for us little guys.

Americans don't want higher prices, we don't have the money. Why do you think so many shop at walmart. Everyone wants fairness but nobody wants to pay for it. My wife is in the local 770, one of her co-workers was complaining the company doesn't want to pay them more. I asked her why she doesn't buy her cosmetics and food at the store she works at, she said it costs to much. So she wants good pay and benefits but won't support the store that's supporting her.

Jul 16, 2014 5:28PM
Walgreen's is doing nothing illegal. They and other companies are merely
taking advantage of a tax loophole.

If you want to blame anyone, blame Congress for writing the law.

Jul 16, 2014 4:49PM
Gotta love the libs.  It's all rainbows and unicorns until somebody's gotta foot the bill.  What happens when the people (and companies) footing the bill get fed up? 
Go for it!  I am all in favor of sending a message LOUD AND CLEAR to the morons in Washington and other tax happy socialist countries, the corporations will not sit idly by and endure not only confiscatory taxes but mountains of regulations upon regulations.   And for any of those who cry foul, or claim Walgreens is Un American, I say BS!  What IS UnAmerican is for a massive and growing bureaucracy, like a cancer which robs our children and their children of a future by heaping massive trillion dollar debt and rising.  What is UnAmerican is for this Administration, lead but the worst president in 60 years to NOT enforce laws, to use the most powerful bureaucracy most Americans deal with , the IRS to target opponents and create a cover up, to allow our borders to be overrun and to make a mockery of the constitution!  My only hope is more companies make the move....
Jul 16, 2014 4:37PM
Corporations will always do what is in the best interest of shareholders, and I guess you can cuss them all you want, but if you want to change their behavior, you have to create an environment conducive to that behaviorial change (i.e. lower corporate tax structure, less regulation, etc.). 
Jul 16, 2014 5:08PM
Jul 16, 2014 4:52PM

Obamnomics is crushing both the middle class and their employers. 


Thanks Bozo!

Jul 16, 2014 5:00PM
So why does Obama and the rest of the Democrat socialists living in a capitalistic economy not understand that a corporation is owed by the stockholders and responsible for generating the maximum return on invested capital allowed under international law - not just US law.  I mean,  as a US citizen I can sell my Walgreen stock and buy stock in any foreign company that gives me greater return on capital like Samsung.  This has nothing to do with patriotism.
Jul 16, 2014 4:00PM
If Walgreen goes ahead with plan to relocate outside the US to save on taxes my family would consider leaving Walgreen. They make the bulk of profits from Americans.
Jul 16, 2014 5:55PM
These companies do not actually move overseas.  They open up shell offices where there is 1 girl who answers the phones.  All business is still conducted here in the US.  Our gov't needs to put a stop to it.
Jul 16, 2014 5:17PM
Sounds to me like the American thing to do!  Screw everyone else!  Pay yourself first!  When prices go up, I buy less!  I've reduced my electric consumption from 80kwh per day down to approx 25kwh per day.  Sure I'm uncomfortable but it makes me feel better when I realize that the power company can't rip me off anymore.  I feel empowered!  I haven't bought a new car in 35 years!  I don't plan on ever buying another new car!  I have a good track record in that respect!  Try for a little more and get a lot less!  That's my response.  When the cost of something exceeds the value of that which it offers, it's time to make a change.  I gave the cable company it's walking papers just last month.   And that's exactly what these American companies are doing with taxes.  They reached the point where they don't want to pay more taxes because it reduces their billions of dollars in profits!  That's money coming out of the stock holders pockets but more so out of the CEO's pockets!  They want that money themselves!  It's the American way!
Jul 16, 2014 5:17PM
Well sure looks like Obama and his crew are doing a good job of getting rid of company's and sending them overseas.
Jul 16, 2014 4:03PM
Maybe the 3 billion they save in taxes could fund the entire cost of the Swiss military and they are getting ready to cut that by 2 billion. They will call on us if someone threatens them. Good luck Walgreen.
Jul 16, 2014 4:41PM
I guess Walgreen's did NOT get President Obama's letter to Congress against tax inversions?
Jul 16, 2014 7:05PM
The easiest way to get back our tax money and create US industry and jobs is to impose large fees and tariffs against all foreign goods and services as they do to US.
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