Walgreen, Water Street Sign Deal - Analyst Blog

Walgreen Co. WAG recently signed a definitive agreement with Water Street Healthcare Partners LLC allowing the latter to acquire a majority interest in Take Care Employer Solutions, LLC. Simultaneously, Water Street signed another agreement to invest in CHS Health Services.

Water Street is a private equity firm, with the healthcare industry as its major focus area. It had recently announced the completion of a merger of its company CCBR-SYNARC with BioClinica, Inc. to create a leading global provider of specialty outsourced clinical services.

Take Care Employer Solutions, LLC, on the other hand, is a Walgreen subsidiary controlling more than 360 worksite health centers nationwide. Likewise, CHS Health Services CHS is a leading provider of more than 130 worksite health centers.

Going forward, Water Street has planned to merge Take Care Employer Solutions and CHS Health services. The new company will comprise nearly 500 worksite health and wellness centers across the U.S. and will cater to the needs of around 200 leading corporations. Financial details of this transaction, which is expected to close by mid-2014, remain undisclosed.

It has been decided that Walgreen will hold a significant minority interest in the new company while Water Street will own a majority stake in the same. Moreover, Walgreen's representatives will be present on the new company's board of directors.

However, Walgreen does not expect the transaction to be accretive to its earnings per share in fiscal 2014.

We believe this agreement will allow Walgreen to strengthen its foothold in the $2.6 trillion health care market. Moreover, with U.S. health care spending expected to grow from 17% of the country's gross domestic product GDP to 20% by 2020, on the back of aging population and health care reform, we are all the more optimistic about the increasing market demand that should benefit Walgreen going ahead.

Currently, Walgreen carries a Zacks Rank #3 (Hold). Some better-ranked stocks worth reckoning in the broader medical sector are Chemed Corp. CHE, Quest Diagnostics Inc. DGX and St. Jude Medical Inc. STJ.  Chemed Corp. sports a Zacks Rank #1 (Strong Buy), while Quest Diagnostics and St. Jude Medical hold a  Zacks Rank #2 (Buy).