Analyst Cautious On Walgreen Co.'s Alliance Boots Deal

Walgreen Co.

shares gained Tuesday on better than expected earnings, but an analyst remained cautious on the company's pending $16 billion merger with privately held Alliance Boots GmbH. Walgreen changed hands recently at $76.07, up more than 2 percent. Bank of America's Robert M. Willoughby said the Boots deal brings with it a significant balance sheet liability, slow-growing profits and an purchasing synergy "that may not be sustainable." Wiloughby maintained a Neutral rating on Walgreen but raised his target nearly 12 percent to $75, citing improved operating trends. Walgreen is set to obtain shareholder approval Dec. 29 for its plan to spend $16 billion to acquire the 55 percent of Swiss-based Alliance Boots it doesn't already own. Walgreen now expects to complete the deal on Dec. 31; it previously planned to close during the calendar first quarter. Although Walgreen beat fiscal first-quarter earnings expectations Tuesday by 8 percent, Wiloughby said investor enthusiasm is focused on the early closing of the Boots deal. Investors are cheered by the pending replacement of Chief Executive Gregory D. Wasson by Boot's Chairman Stefano Pessina, while other benefits are seen in the merger relative to Walgreen's current difficulties with slowing customer traffic, higher costs for generic drugs and lower insurance reimbursement rates. But Wiloughby questioned the deal's "capital efficiency" and called it a "vastly more complex strategy" compared with CVS Health Corp.'s

2007 acquisition of Caremark. "We're less convinced of the sustainable competitive advantage it creates" particularly in the U.S., Wiloughby said.