THE WALL STREET
Investor Scores a Win at Walgreen
Hedge Fund Jana Partners Will
Receive Two Board Seats as It Works With the Chain to Lower Costs
Sept. 8, 2014 12:01
Jana Partners and Walgreen were engaged in a mostly nonpublic
discussion about steps Walgreen could take to boost shares,
people familiar with the matter said. Above, a Walgreens store
in Hollywood. Getty Images
Walgreen Co., facing mounting
pressure from analysts and shareholders, said it is giving activist
investor Jana Partners LLC two board seats, a relatively large say for
a shareholder with a little more than 1% of the company's stock.
The nation's largest pharmacy chain recently disappointed shareholders
with its dreary financial projections and its decision not to cut its
tax rate by
relocating its corporate headquarters overseas. The Deerfield,
Ill., company also abruptly replaced its chief financial officer in
after its internal financial forecasts for pharmacy sales were
slashed by $1.1 billion. The stock lost 15% during that month, though
it has since gained some back.
The agreement with Jana is a big win for an activist investor. These
firms typically buy up shares in companies and urge change such as
financial maneuvers, asset sales and management shake-ups. While
Jana's stake in Walgreen was small percentage-wise—about 1.2%—some
activists have also scored wins with similar positions in large
companies. Walgreen has a market capitalization of around $61 billion.
Still, gaining more than one board seat with only 1% of the stock is
notable. Microsoft Corp., for
instance, granted San Francisco firm ValueAct Capital Management LP,
which owned less than 1%, a single seat on its board, a concession
that raised the profile of ValueAct and was much discussed in
boardrooms around the country, corporate advisers have said. Many
companies resist giving activists a single director seat, for fear of
their influence once in the boardroom.
Since the spring, Jana and Walgreen were engaged in a mostly nonpublic
discussion about steps the company could take to boost shares, people
familiar with the matter said.
Jana's Barry Rosenstein and Walgreen Chief Executive
had largely friendly and constructive conversations, even as Walgreen
rejected the suggestion to move, which had ignited public controversy,
people on both sides said.
With seats on the board, Jana will now work with Walgreen to cut costs
and change the kinds of products the drugstore chain stocks on it
shelves, while also urging changes to its capital allocation, such as
increasing its stock repurchase plan, the people said.
Mr. Rosenstein will join Walgreen's board immediately, and Jana will
place a second director as soon as it identifies a candidate Walgreen
accepts, expanding the board to 15, Walgreen said. The hedge fund will
also get a say in filling the next board vacancy, whenever that comes
during the length of Jana's investment period.
"We are pleased to welcome Barry to the board in this pivotal moment
for our company," Walgreen Chairman
Skinner said in a statement.
The New York hedge fund had pushed Walgreen to do a so-called tax
inversion, people familiar with the matter have said. Walgreen could
have done so by completing a potential deal to buy the rest of
European drugstore chain Alliance Boots GmbH and moving its
headquarters abroad to a country with a lower tax rate.
But amid a public backlash on such deals, including from the Obama
administration, Walgreen decided against the move when it announced
its plan to buy the rest of Alliance Boots last month. Walgreen also
put forward an estimate for its earnings that surprised shareholders.
Amid the double punch that day, the stock fell 14%.
Though Jana had wanted the inversion done, Mr. Rosenstein continued to
push other changes he had previously suggested to the company. He
urged it to learn more from Alliance Boots, which is known for selling
high-end beauty products at its pharmacies, the people said.
The disappointing financial guidance was the result of an internal
sales forecast that was missed by more than $1 billion, a mistake tied
to Medicare-related sales, The Wall Street Journal reported last
Before the forecast, analysts at
Barclays Capital had
warned in a June report that the board was susceptible to an investor
uprising that could push the company to put Alliance Boots management
Walgreen's decision in August to increase its dividend and launch a $3
billion share buyback also failed to appease critics. Barclays
questioned management for not doing a larger buyback on a public
In June, Barclays had estimated a $14 billion buyback was possible.
Walgreen is now planning an investor day, a step Jana has advocated at
other companies, where it will discuss capital allocation and its
For Jana, which manages $11 billion in assets, the agreement is the
latest in a string of deals that came without a public brawl for board
seats. The hedge fund has seen its ideas quickly adopted or carried
out at oil-and-gas company Apache
Corp., grocery-store chain Safeway
Inc., and engineering and construction firm
URS Corp. None are near the
size of Walgreen. Apache and Safeway had taken some steps before
But the hedge fund will still fight publicly, such as the recent push
to get pet-store chain PetSmart
Inc. to put itself up for sale. PetSmart last month announced a
strategic review, citing a process that began before Jana revealed an
David Benoit at