How A Walgreens-AmerisourceBergen Combo Stacks Up Against CVS-Aetna

Some see Walgreens Boots Alliance Inc WBA’s reported pursuit of AmerisourceBergen Corp. ABC as a smart defensive play.

The purchase would cut costs in the drug supply chain, increase appeal with pharmacy benefit managers and insurers and strengthen the drugstore operator against rivals like, Inc. AMZN, according to CNBC.

But one sell-side analyst is expressing doubt about a deal. 

'It Doesn’t Make Sense'

An acquisition makes sense, considering the recent wave of health care consolidation, but this particular acquisition by this particular buyer would be a “head-scratcher,” said Baird analyst Eric Coldwell. In fact, Coldwell said he is dubious of the veracity of the Wall Street Journal report.

“I like Walgreens and I like ABC,” the analyst told Benzinga. “I have Outperforms on both stocks, but I’m struggling to see the merits of this deal.”

For one, Walgreens has an existing global distribution business and is vertically integrated outside the U.S.

At the same time, the incremental benefits of deepening its AmerisourceBergen relationship relative to the purchase price are unseen.

AmerisourceBergen already supports Walgreens’ general procurement, while Walgreens occupies a seat on the target’s board, owns a 26-percent stake and is the firm’s largest client. Walgreens represented 30 percent of AmerisourceBergen’s revenue last year, and Coldwell said the present arrangement is inexpensive.

“If Walgreens wants to do something innovative with ABC, ABC is going to be all over that,” he said. “They’re going to be happy to do it, happy to work together. I just don’t know what you really get by becoming a vertically integrated distributor in the U.S.”

What Could Go Wrong?

A merger might also fail to stave off the threat of a united CVS Health Corp CVS-Aetna Inc AET.

“Frankly, I see the CVS-Aetna transaction as high-risk, high reward, whereas the Walgreens-ABC transaction, if it were to come to fruition, I would see as low-risk, low reward,” Coldwell said. “Certainly it would be a lot easier to buy the rest of ABC and integrate it and a lot less risk with external customers or competitors than with CVS-Aetna, a lot less investment that would have to be made over the next decade — but if CVS and Aetna get it right, and that’s an ‘if’ for me, if they get it right, the payoff could be a lot bigger than Walgreens plus ABC.”

By the Baird analyst's assessment, Walgreens would be wise to wait while CVS and Aetna test their model. If their strategy fails, Walgreens could opt out of M&A and be viewed more attractively than its competitor. 

If the model succeeds, the independent, pure-play pharmacy could be an attractive target for United, Humana Inc HUM, Anthem Inc ANTM, CIGNA Corporation CI or others looking to replicate Aetna’s strategy.

Ownership of ABC may diminish Walgreens’ appeal and preclude this opportunity, Coldwell said. 

“It just seems you’d be locking yourself into a strategy, whereas there might be other options down the road,” Coldwell said.

The Other Options

Those other options are numerous considering Walgreens’ relationship history — the recent Rite Aid Corporation RAD store purchases; the Walgreens-Prime joint venture for specialty pharmacy; the stake in KKR’s PharMerica; the sale of its infusion business to Madison Dearborn; the partnership with UnitedHealth Group Inc UNH; the leasing of Walgreens walk-in clinics to local health systems; even the FedEx Corporation FDX collaboration.

“I don’t know how buying ABC makes sense right here right now when there are so many other dynamics in the marketplace,” Coldwell said, noting that Walgreens could instead expand its partnership with FedEx or even collaborate with Amazon.

Haste Makes Waste

The analyst said he is not entirely opposed to a Walgreens-AmerisourceBergen transaction, nor does he consider it “awful.” He’s merely unconvinced that it would be accretive and sees time for careful deliberation.

“I don’t know how ABC could really do anything with anybody else,” he said. “You’re not at risk of losing them, I would think. You already own 26 percent of them. You’re their biggest client. They’re not going anywhere.”

At the time of publication, Walgreens was trading relatively flat while AmerisourceBergen traded up more than 9 percent.

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Photo by Theopolisme/Wikimedia. 

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