WAG's Pain is CVS' Gain

Rarely do we see a binary equity relationship defined as clearly as we have today.  The case could be made that the Boeing/EADS relationship is one such example, but these are companies located in different continents.  Well, today we see as close to a pure example of such a relationship in the US equity market. 

Wallgreen announced the purchase of European pharmacy chain Alliance Boots.  Have Wallgreen's ongoing difficulties with Express Scripts led them to change their strategy and go international?  It sure looks this way.  Does this signal capitulation to CVS Caremark in the U.S. market?  Well, at least Wallgreen got it for a discount since, well...it's Europe (and we all know that market is less than happy).  Right?  It does't look that way.  From Reuters: 

"The synergy numbers are very real," says GAMCO Investors analyst Jeff Jonas, highlighting verticals like drug procurement and Boots' beauty products. Still, Jonas calls the deal "defensive" and says that, as a result, Walgreens paid a full price of roughly 10-to-11 times Alliance Boots' expected earnings.

Additionally, there are questions about the valuation.  From Bloomberg:

The deal will lead to cost and revenue benefits across both companies of $100 million to $150 million in the first year and $1 billion by the end of 2016, according to the statement.

Walgreen, which was advised by Goldman Sachs Group Inc. (GS) and Lazard, forecast the transaction will add 23 cents to 27 cents a share to diluted earnings per share in the first year after completion of the initial investment, excluding one-time costs. Alliance Boots was advised by Centerview Partners.

Some investors are skeptical about the projections for additional per-share earnings next year, said Brian Sozzi, an independent analyst in New York.

“The market doesn’t believe the projections,” Sozzi said in a telephone interview. “There is big-time integration risk here putting together a giant U.S. pharmaceutical business with a giant U.K. pharmaceutical business.”

The U.S. drugstore owner has lined up $3.5 billion of short-term debt financing from Goldman Sachs and Bank of America Merrill Lynch to help fund the acquisition, according to a statement from KKR. Walgreen plans to replace the bridge facility with permanent financing at a later stage.

In any case, the outcome is that Wallgreen stock goes down and CVS Caremark goes up.  I would attribute much of Wallgreen's troubles to their defensive position which is the result of the long dragged out but seemingly successful merger of CVS Caremark.  For this reason, CVS remains a buy.  Like any announcement, investors must now wait and see.