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AmerisourceBergen (ABC - Analyst Report) recently announced that it has entered into a strategic agreement with Walgreen Company (WAG - Analyst Report) and Alliance Boots GmbH.

The agreement includes a 10-year pharmaceutical distribution contract with Walgreens and access to generic drugs and related pharmaceutical products through the Walgreens Boots Alliance Development joint venture.

In return, both Walgreens and Alliance Boots have been granted rights to jointly purchase a minority equity position in AmerisourceBergen.

Walgreens and Alliance Boots can purchase up to 7% stake in AmerisourceBergen. Additionally, AmerisourceBergen has granted warrants to both the companies for a 16% stake. AmerisourceBergen will allocate the warrants equally among Walgreens and Alliance Boots.

The first tranche of warrants with a strike price of $51.50 represents an 8% stake, which can be exercised in a six-month period beginning Mar 2016. The second tranche of warrants represents the remaining 8% stake with a strike price of $52.50 and will be exercisable for a six-month period beginning Mar 2017.

The agreement is intended to streamline the distribution of pharmaceuticals to Walgreens’ stores along with leveraging global supply chain efficiencies. The broader goal is to maintain an efficient healthcare system by improving patient access to affordable pharmaceuticals.

The agreement also allows Walgreens to appoint one director to AmerisourceBergen’s board as and when Walgreens and Alliance Boots together acquire a 5% equity stake. Walgreens can also appoint a second director upon exercising the first tranche of warrants.

Meanwhile, both Walgreens and Alliance Boots have agreed to customary transfer restrictions on their equity stake. Under the terms of a standstill agreement, both the companies will not try to acquire additional equity stake in AmerisourceBergen.

The agreement is effective Sep 1, 2013 and is expected to be accretive in fiscal 2014 with an incremental contribution of $28 billion to the top line and approximately 20 cents per share to the bottom line.

AmerisourceBergen expects incremental brand revenues of at least $2 billion in Sep 2013. Consequently, AmerisourceBergen revised its guidance for fiscal 2013. The company now expects revenues to increase 8% – 11% in fiscal 2013, up from the previous guidance of 6% – 9% increase. 

We note that Walgreens existing pharmaceutical distribution contract with Cardinal Health (CAH - Analyst Report) ends on Aug 2013 and the contract will not be renewed further. Walgreens is one of Cardinal Health's two largest customers, generating approximately 21% of revenue in fiscal 2012.

Hence, we believe the agreement will further augment ABC’s strong distribution network paving the way for incremental growth as Walgreens is well positioned in retail pharmacy business. Competition in the pharmaceutical distribution market remains tough with players like McKesson Corporation (MCK - Analyst Report).

AmerisourceBergen carries a Zacks Rank #2 (Buy).

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