Walgreens' big bet on Europe: Bad idea?

The pharmacy giant purchases a stake in European mega-chain Alliance Boots -- putting itself at the mercy of the continent's worsening debt crisis.

By TheWeek.com Jun 20, 2012 5:35PM

Image: Pills (© Sean Justice/Corbis)Walgreens (WAG) is purchasing a 45% stake in European pharmacy powerhouse Alliance Boots (AB) for nearly $7 billion. The deal is seen as a first step toward outright acquisition, which would make the combined company a global pharmacy giant with 11,000 stores in 12 countries.


Walgreens' share price plunged after the announcement, however, due to concerns that it had dangerously exposed itself to fallout from Europe's debt crisis, which continues to rage. 


Is Walgreens' big bet on Europe a bad idea?

This is smart. The stagnant company must grow: Walgreens' share price "has gone nowhere over the last decade," says Jonathan Sibun at Britain's The Telegraph. The company is a "mature business that needs to look beyond its borders," particularly since investors are clamoring for "a growth story." Alliance Boots offers Walgreens access to British and European markets, as well as those in emerging economies. "All told it's a pretty powerful medicine."


And Walgreens will dominate the prescription drug market: Walgreens is best known for "encouraging customers to buy lower-cost generic copies over the expensive brand name prescriptions," says Bruce Japsen at Forbes, and its enhanced buying power will allow it to push generics' prices down even further. The combined company stands to become the most dominant player in the lucrative prescription drug market.


No way. This is a bad deal: Investors understandably dumped Walgreens' shares over its "new exposure to uncertain European economies," say Timothy W. Martin and Ryan Dezember at The Wall Street Journal. Furthermore, it appears Walgreens overpaid, leading credit-rating agencies to consider downgrading the company. The "once-torrid growth of prescription drugs has slowed in recent years," and Alliance Boots won't help Walgreens reverse its falling sales in the U.S. This could go wrong in many ways. 


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