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Walgreen Eyes Another Acquisition

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Acquisition spree continues for the leading retail pharmacy chain, Walgreen as it recently entered into an agreement to acquire a mid-South US-based regional drugstore chain from Stephen L. LaFrance Holdings Inc. for $438 million. The deal is expected to close by September 1, 2012.

Per the deal, Walgreen will get hold of a pharmacy chain of 144 stores located in Arkansas, Kansas, Mississippi, Missouri, New Jersey, Oklahoma and Tennessee. These stores currently operate under brands like USA Drug, Super D Drug, May’s Drug, Med-X and Drug Warehouse stores.

Walgreen believes that this acquisition will help expand its business in several key regions of the nation but rules out any material impact on its fiscal 2012 EPS. This is to note that the regional drugstore chain delivered sales of $825 million in fiscal 2011.

In order to negate the impact of the Express Scripts (ESRX - Free Report) contract loss, Walgreen is currently concentrating on several strategic steps to drive growth. Two weeks back, the company entered into a strategic partnership with a global international pharmacy-led health and beauty group Alliance Boots GmbH to buy 45% stake in it for $6.7 billion. The company also holds the option to acquire the remaining stake over the next three years for an approximate value of $9.5 billion in cash and stock.

Also in May this year, Walgreen completed the acquisition of certain assets of BioScrip's (BIOS - Free Report) community specialty pharmacies and centralized specialty and mail service pharmacy businesses that include a national network with 30 locations in 16 states across the US and the District of Columbia, primarily serving HIV, oncology and transplant patients. Walgreen also acquired certain assets of BioScrip's traditional mail service pharmacy business that dispenses prescriptions for, which was acquired by Walgreen in June 2011.

We expect these new ventures of Walgreen to add to the company’s growth going forward. However, time will only show whether all these initiatives will be able to provide significant cushion or alleviate the Express Scripts contract related headwinds over a long-term horizon. Walgreen has also been affected over the past few quarters by high unemployment levels and lower discretionary spending.

Currently, Walgreen retains a Zacks #3 Rank (short-term Hold rating). We have a ‘Neutral’ recommendation on the stock over the long term.

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