Walgreen Bulls Bet Investor Activism Will Cure Tax Pain
By Inyoung Hwang Sep 18, 2014 7:00 PM
entry of an activist shareholder into the board of
Walgreen Co. (WAG)
may be just what the doctor ordered for options traders betting on the
largest U.S. pharmacy chain after a 17 percent plunge.
While the Deerfield, Illinois-based company’s stock has tumbled since
reaching a record in June, bullish contracts are the most expensive
relative to bearish ones in almost seven years, data compiled by
Bloomberg show. Investors are lured by the potential for share
buybacks and earnings growth as hedge fund Jana Partners LLC, which
has agitated for a more shareholder-friendly use of Walgreen’s cash,
struck a deal with the company on three board seats.
As part of the settlement on Sept. 8, Jana founder Barry
Rosenstein joined Walgreen’s board, got his choice of a second
director and a joint say in picking a third. Photographer:
Walgreen dropped 14 percent on Aug. 6 after saying it won’t shift its
tax address out of the U.S. even as it announced a $15.3 billion
purchase of the rest of Switzerland-based Alliance Boots GmbH.
Investor disappointment over that decision waned this month after the
“Jana Partners getting board seats is a very positive step and shows
they are being pretty shareholder-friendly,”
a portfolio manager at Gabelli & Co., which manages $43 billion and
owns Walgreen shares, said in an interview. “Walgreen can be more
aggressive in cutting costs. There is room for improvements and Jana
is going to be aggressive in pushing for them. When the deal is
ultimately done with Alliance Boots, it will be a very attractive
part of the settlement on Sept. 8, Jana founder
joined Walgreen’s board, got his choice of a second director and a
joint say in picking a third. The changes will result in a stronger
voice for shareholders in the combined company, Mark Wiltamuth, an
analyst at Jefferies Group LLC in
wrote in a note.
$11 billion investment-fund Jana, which owned 1.2 percent of Walgreen
shares as of June 30, will use the board positions to push for more
buybacks, a person familiar with the matter said. The owner of more
than 8,500 pharmacies operating in every U.S. state reports
fourth-quarter earnings on Sept. 30.
same day it said it will keep its domicile in the U.S., Walgreen
announced a smaller-than-expected buyback plan of $3 billion and cut
for adjusted earnings by $2 billion. The drug retailer has also missed
analysts’ profit estimates for the last two quarters, according to
data compiled by Bloomberg.
Walgreen’s 17 percent loss since reaching an all-time high of $76.08
on June 18 compares with the Standard & Poor’s 500 Index’s advance of
2.8 percent in the same period.
Analysts project Walgreen’s
will jump 16 percent in 2015, according to data compiled by Bloomberg.
Profit this year is estimated to climb 4 percent, the slowest growth
rate since earnings contracted in 2009, the data show.
Walgreen bought a 45 percent stake in Alliance Boots,
largest pharmacy chain, in 2012 and had the option to gain full
control of the chain. The agreement reached in August allows it to buy
the remaining 55 percent by Feb. 5, 2015.
Investors had favored the deal, among other things, for its potential
to reduce the company’s tax liability. They pushed the stock up 12
percent in the second quarter amid speculation the deal was imminent.
Deutsche Bank AG said in June that a tax inversion -- moving the legal
address to a low-tax country -- would add as much as $15 to the share
While tax inversions are increasing as European countries aim to boost
economic competitiveness by slashing corporate-tax rates, Walgreen has
faced political pressure not to do one. Senator
an Illinois Democrat, said in a July 22 letter to the company that
such a shift would amount to “turning your backs on the very people
that have allowed Walgreen’s to thrive and prosper.”
Walgreen’s business faces challenges and Jana’s agreement on the board
seats comes with a standstill limitation of not owning 5 percent or
more of shares outstanding for some time, according to
an analyst at Friedman Billings Ramsey & Co. Pressures in
reimbursements and higher costs in procuring generic drugs are among
the challenges, he said. Halper has a market-perform rating, the
equivalent of a hold, on Walgreen and predicts the shares will climb
to $66 each in the next year.
“It’s our view that investors should be a little cautious,” Halper
said by phone from New York. “Walgreen has been conservative in the
buyback area, but it’s impossible to know which direction the board
will go post-Jana, post-merger.”
Calls betting on a 10 percent rally in Walgreen cost 1 point more than
puts betting on a decline of that size on Sept. 8, according to data
on two-month contracts compiled by Bloomberg. That was the most since
Graham, a spokesman for Walgreen, declined to comment on the options
trading in his e-mail response.
puts, with bullish wagers totaling 491,193 on Sept. 17, compared with
367,520 bearish options, according to data compiled by Bloomberg.
contracts, seven were bullish. Calls betting on a gain to $72.50 by
Oct. 18 had the highest ownership, followed by those wagering on a
gain to $70 over the same period, Bloomberg data show.
Walgreen’s sales on a month-by-month basis are stabilizing and
pharmacy demand is slowly accelerating, David Magee, an analyst at
SunTrust Robinson Humphrey Inc. in Atlanta, said. He recommends
investors buy the stock and projects it will climb to $72 in a year.
company is coming off a major disappointment, so some faster money has
left the name right now,” Magee said. “At the same time, if you sift
through last month’s wreckage, there are reasons for optimism.”
contact the reporter on this story: Inyoung Hwang in London at
contact the editors responsible for this story: Cecile Vannucci at
email@example.com Srinivasan Sivabalan, Jeremy
©2014 Bloomberg L.P.
All Rights Reserved