Walgreen Prices $4B Senior Notes

Walgreen's ( WAG - Analyst Report ) has priced its senior notes, the proceeds of which will be used primarily to repay borrowings, costs and expenses related to the acquisition of a 45% equity interest in Alliance Boots GmbH for an aggregate purchase price of $6.7 billion.

The company is issuing the notes in five installments – $500 million of floating rate notes due 2014; $750 million of 1.0% senior notes due 2015; $1.0 billion of 1.8% senior notes due 2017; $1.2 billion of 3.1% notes due 2022and $500 million of 4.4% senior notes due 2042. The issuance of these notes will close on September 13, 2012.

Besides repayment of a loan related to this acquisition, the company also intends to use the net proceeds of the offering for general corporate purposes including its previously announced USA Drug acquisition. On July 23, 2012, the company entered into an unsecured 364-Day Bridge Term Loan Agreement with a borrowing limit of up to $3.5 billion to fund a portion of the first phase of the Alliance Boots acquisition.

Historically, Walgreen Co. has been using its cash balance to make strategic acquisitions as well as rewarding its shareholders through share repurchases and dividend payments. During the last reported quarter, the company returned $371 million, including $195 million in dividends and $176 million through the share repurchase program.

The company also declared a 28.6% hike in its regular quarterly dividend to $0.275 per share, in line with its long term dividend payout ratio of 30–35%. It is encouraging to note that the company has been paying dividends for more than 79 years and the recent hike marks the 37^th consecutive quarter of dividend increase for the company. We believe that suitable acquisitions on the back of healthy cash balance should drive its revenues going forward.

On August 6, 2012, Walgreen's acquired a 45% stake in global international pharmacy-led health and beauty group Alliance Boots with the aim of becoming the world’s first pharmacy driven health and well-being retailer with more than 11,000 stores in 12 countries. Walgreen's also holds an option to acquire the remaining stake over the next three years for an approximate value of $9.5 billion in cash and stock.

Walgreen Co. expects the first step of this transaction to be accretive to its earnings per share (EPS) by 23−27 cents in the first year. The company also expects the synergies across joint operations to be between $100 million and $150 million in the first year and $1 billion by the end of 2016.

Walgreen's believes that this joint company will form a major global network in pharmaceutical wholesale and distribution with over 370 distribution centers catering to 170,000 pharmacies, doctors, health centers and hospitals across 21 countries. Furthermore, it will also be considered as the largest purchaser of prescription medicines and many of the health and wellbeing products.

We are also encouraged with the settlement with Express Scripts ( ESRX - Analyst Report ) , which had dragged on for 7 months. The Express Scripts contract loss was a blow to Walgreen's, since the earlier contract used to contribute a significant part to its sales (12.6% of total prescriptions filled in August 2011). As a result, the company’s results have disappointed since the beginning of 2012.

Walgreen Co. posted dismal sales results for the month of August 2012 and recorded a decline of 4.5% from the year-ago quarter, mainly on account of the termination of the Express Scripts contract in January 2012. However, the scenario is expected to improve radically with the renewal of deal between the two stalwarts (effective September 2012). Following the recent agreement, we believe that Walgreen's is poised to compensate for the losses incurred since the termination of the previous deal in January 2012.

We have a Neutral recommendation on Walgreen Co. The stock retains a Zacks # 3 Rank (Hold rating in the short term).