Walgreen may ditch US for Switzerland
The move, known as an inversion, has never been attempted by a major American retailer.
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.
YOU CAN THANK OUR LOVELY POLITICIANS FOR THIS.
THEY TAX GOOD COMPANIES SO THEY CAN GIVE OUR TAX DOLLARS TO GUATEMALA AND ALL OF THE IMPOVERISHED COUNTIES INSTEAD OF HELPING AMERICA
VOTE ALL OF THE BUMS OUT, LETS GET SOMEONE WHO REALLY CARES ABOUT OUR COUNTRY.
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.
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.
taking advantage of a tax loophole.
If you want to blame anyone, blame Congress for writing the law.
Obamnomics is crushing both the middle class and their employers.
Copyright © 2014 Microsoft. All rights reserved.
These hot movers could rise by double digits in coming months.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.