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Walgreens (WBA) Divests Alliance Healthcare Business for $6.5B

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Walgreens Boots Alliance, Inc. (WBA - Free Report) recently announced the completion of the previously-announced divesture of Alliance Healthcare businesses. In January 2021, Walgreens signed a strategic agreement to sell the majority of its Alliance Healthcare businesses to AmerisourceBergen Corporation for the total value of $6.5 billion.

Further, Walgreens and AmerisourceBergen will implement the expansion and extension of commercial agreements that are expected to bring incremental growth and synergies.

The divesture will enable Walgreens to increase its focus on further acceleration of its core retail pharmacy businesses and reduce debt balance.

Financial Details

AmerisourceBergen acquired Alliance Healthcare for a total amount of nearly $6.5 billion, which includes of $6.275 billion in cash (subject to a customary net cash and working capital adjustment) and 2 million shares of AmerisourceBergen common stock.

Per the previous transaction details announced on Jan 6, the businesses sold will be classified as “businesses held for sale” effective from Walgreens’s second-quarter fiscal 2021. Further, the transaction is expected to be slightly dilutive in the current financial year for Walgreens but will be accretive in the long term.

Significance of the Divestment

Walgreens will primarily utilize the cash proceeds to pay down debt. We note that the company’s high level of debt on the balance sheet is concerning. At the end of the last-reported second quarter of fiscal 2021, the company had total debt of $16.16 billion on its balance sheet.

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Per Walgreens’ management, this divestment will accelerate growth of its core retail pharmacy and healthcare businesses. The closure of this transaction signifies a major step forward in the company’s transformation and will stimulate investments to grow Walgreens’ core retail pharmacy and healthcare businesses. The divesture will enable Walgreens to accelerate its progress on its clear set of strategic priorities.

By leveraging Alliance Healthcare, which is the largest pharmaceutical wholesaler in Europe, AmerisourceBergen will expand its core wholesale, distribution, and related solutions capabilities. Moreover, the addition of Alliance Healthcare will improve AmerisourceBergen’s existing global platform of manufacturer services and advance its ability to support global access.

Per the previous announcement made on Jan 6, in addition to the divesture deal, Walgreens and AmerisourceBergen have extended their U.S. strategic partnership through 2029. The companies anticipate the financial benefits of the expansion to increase over the next three years to achieve annual run-rate synergies of at least $150 million by the fourth year, which will be shared equally between the companies.

Industry Prospects

Per a report by The Business Research Company, the global pharmacies and drug stores market is expected to rise from a worth of $971.51 billion in 2020 to $1299.8 billion in 2025, at a CAGR of 6%.

Considering the market growth, Walgreens recent divesture of Alliance Health to focus on core retail pharmacy is well-timed.

Notable Developments

In April 2021, Walgreens inked a deal with Abbott Laboratories (ABT - Free Report) to sell Abbott’s BinaxNOW Rapid Antigen Self Test over-the-counter nationwide at Walgreens stores. The agreement is part of Walgreens’ continued efforts to increase access to COVID-19 testing across the United States.

In the same month, Walgreens announced that it is currently administering COVID-19 vaccination across 49 states, Washington, DC, and Puerto Rico. With the expansion of COVID-19 vaccination, Walgreens continues to play a vital role in the nation’s vaccination and pandemic response efforts.

Price Performance

Over the past six months, shares of the company have gained 29.1% compared with the industry’s rise of 19.1%.

Zacks Rank and Key Pick

Currently, the company carries a Zacks Rank #3 (Hold).

A better-ranked stock from the broader medical space is Envista Holdings Corporation (NVST - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of Zacks #1 Rank (Strong Buy) stocks here.

Envista Holdings has an estimated long-term earnings growth rate of 26%.

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