Power Struggle at Walgreen as Biggest Shareholder Rises
By Cynthia Koons
Sep 10, 2014 7:01 PM ET
Photographer: Munshi Ahmed/Bloomberg
Stefano Pessina, executive chairman of Alliance
Boots GmbH, is seen in this 2008 file photo.
Stefano Pessina, an Italian-born nuclear engineer turned drug-store
mogul, is emerging as a powerful force within
Walgreen Co. (WAG)
as it evolves from being the biggest U.S. pharmacy chain into an
Pessina, 73, built Bern, Switzerland-based Alliance Boots GmbH through
more than three decades of mergers before selling it to Walgreen last
month. Now, he’s assuming a new role at Walgreen as executive vice
chairman of the combined company, responsible for strategy and deals.
Greg Wasson, 55, remains chief executive officer.
Investors say Pessina’s growing influence, with Alliance Boots
lieutenants filling four of the merged company’s top nine positions,
will push Walgreen from its neighborhood pharmacy role to the more
stylish retail vision of Boots Alliance, which controls about 40
percent of the high-margin market for beauty products in the U.K.
“I’m glad to see more Boots people coming on board, I think everybody
agrees that that’s the better run and more innovative company,” said
associated portfolio manager at Gabelli Funds, a Walgreen shareholder.
A change in Walgreen’s board will further strengthen Pessina’s
position. This week, the company announced that it struck a deal with
hedge fund Jana Partners LLC that allows Jana to hold two board seats
and help choose a third, an agreement widely seen as favoring the
former Boots chairman.
Hedge Fund Stake
Photographer: Luke Sharrett/Bloomberg
The cosmetics section of a Walgreen store in
Louisville, Kentucky, on Sept. 30, 2013.
In April, after Jana said it invested $1 billion in Walgreen, partner
Scott Ostfeld said the company’s buyout of Alliance Boots and
Pessina’s presence on the board “will lead to the revitalization of
this iconic brand and produce years of earnings growth through
synergies, fixing operations and improving capital allocation.”
Pessina’s rise inside the Walgreen universe dates to 2012, when
Walgreen bought a 45 percent stake in
That agreement gave Pessina a seat on Walgreen’s board and 7.6 percent
of the Deerfield, Illinois-based company’s stock. When Walgreen said
on Aug. 6 that it would buy the rest of Alliance Boots for $15.3
billion, it made Pessina by far the biggest holder, with 16 percent of
the combined company after the deal closes. Since Aug. 6, the shares
are down 8 percent.
That same day, Walgreen unveiled a smaller-than-expected $3 billion
share buyback and an about $2 billion cut to its adjusted earnings
forecast, which sent the shares down as much as 16 percent and damaged
the U.S. management’s reputation with investors. The chief financial
officer and the pharmacy president both left their roles within weeks
of the news.
Safe for Now
As for Wasson, who began his career at Walgreen as a pharmacy intern
and has remained there since, his job appears safe for now.
“He has a lot of respect inside Walgreen, it’s better to have someone
like him who’s a change agent than forcing some outside person on the
company,” said Jon Wolfenbarger, director at Allianz Global Investors,
the parent of which is Walgreen’s 18th biggest shareholder, according
to data compiled by Bloomberg. “If things aren’t better in a year or
two, obviously at some point, shareholders might want to have a
Pessina has been building his power base at Walgreen since at least
2013, investors say.
After securing his 7.6 percent stake, he began to personally visit
fellow large shareholders to find what kinds of changes they wanted,
according to three people who spoke with him at the time and asked not
to be named because the talks were private.
At a July 2013 lunch with about 20 investors at the St. Regis hotel in
Pessina criticized Walgreen’s operations, saying they didn’t compare
favorably with what Alliance Boots was doing in its London stores,
according to one investor who attended. For example, Alliance Boots
has about 40 percent of the beauty market in the U.K., while Walgreen
has just 3 percent in the U.S., said Tony Scherrer, director of
research at Smead Capital Management.
After the lunch, the investor said he asked Pessina what leverage he
had to force changes without an operational role.
The stake he held in Walgreen was all the leverage needed, Pessina
Alliance Boots spokeswoman Julie Longton said neither the company nor
Pessina would comment on “private discussions between shareholders.”
Soon after that July lunch, the company began providing investor
relations employees to accompany Pessina as he continued to meet with
investors, said a shareholder who talked with him later. Michael
Polzin, a Walgreen spokesman, declined to comment on shareholder
Management’s concerns about Pessina’s views at the time may also have
been part of Walgreen’s decision not to move its tax address overseas,
said a person familiar with the discussions.
While scrutiny from U.S. tax authorities has been cited by the company
as a reason for not making such a move, the managers also privately
discussed the fact that Pessina would gain more shares as a result of
regulatory rules involving stock thresholds in an inversion.
That decision has since been criticized for costing the company as
much as $4 billion in future tax advantages over five years, according
to one estimate.
Pessina’s maneuvering is reminiscent of an earlier deal he was
involved in. He was executive deputy chairman of Alliance UniChem Plc,
and owned 30 percent of the business before it was sold to Boots Group
Plc to create Alliance Boots in 2005.
was put in charge of the joined companies, though not for long.
The business was subsequently sold to private equity firm KKR & Co. in
2007, which had teamed up with Pessina to do the buyout. Baker left
after “discussing the option of continuing in a role as CEO,”
according to a statement at the time. Fergus Wheeler, an external
spokesman for Advent International Corp. where Baker is an operating
partner, said Baker wouldn’t comment.
Even with Pessina bringing his business acumen to Walgreen’s executive
team, Walgreen still has a lot to prove, according to Gabelli’s Jonas.
“It’s going to be an attractive company,” he said. “But there are
going to be some bumps along the way.”
To contact the reporter on this story: Cynthia Koons in
To contact the editors responsible for this story: Reg Gale at
email@example.com Drew Armstrong
©2014 Bloomberg L.P.
All Rights Reserved