Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

See related case examples of

Dell Inc.

appraisal rights for intrinsic value realization

and

Walgreen Co.

stock buyback policies

"Fair Access" Home Page

"Fair Access" Program Reference

For graphs of specific company and related industry returns, see

Returns on Corporate Capital

For graphs of specific company voting for the past 5 years, see

Shareholder Support Rankings

 

 

 

Forum distribution:

Use of speculation pricing as measure of company performance

 

Source: Bloomberg, September 18, 2014 article

Businessweek.com

Bloomberg

Walgreen Bulls Bet Investor Activism Will Cure Tax Pain

By Inyoung Hwang Sep 18, 2014 7:00 PM ET


The 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: Daniel Acker/Bloomberg

 

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 board changes.

“Jana Partners getting board seats is a very positive step and shows they are being pretty shareholder-friendly,” Jeff Jonas, 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 company.”

‘Stronger Voice’

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. The changes will result in a stronger voice for shareholders in the combined company, Mark Wiltamuth, an analyst at Jefferies Group LLC in New York, wrote in a note.

The $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.

The 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 its forecast 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.

Profit Growth

Analysts project Walgreen’s earnings 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, Europe’s 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 price.

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 Richard Durbin, 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.”

‘Caution Necessary’

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 Steven Halper, 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 October 2007.

Jim Graham, a spokesman for Walgreen, declined to comment on the options trading in his e-mail response.

Bullish Bets

Walgreen calls outnumbered puts, with bullish wagers totaling 491,193 on Sept. 17, compared with 367,520 bearish options, according to data compiled by Bloomberg.

Of the 10 most-owned 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.

“The 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.”

To contact the reporter on this story: Inyoung Hwang in London at ihwang7@bloomberg.net

To contact the editors responsible for this story: Cecile Vannucci at cvannucci1@bloomberg.net Srinivasan Sivabalan, Jeremy Herron


©2014 Bloomberg L.P. All Rights Reserved

 

 

This Forum program is open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.