Recently, the divestment of Walgreen’s (WAG) pharmacy benefit management (PBM) business to Catalyst Health Solutions (CHSI) for $525 million was completed. Walgreen anticipates the deal to be EPS-neutral in fiscal 2012.
Subsequent to this deal, Walgreen will be able to better focus on its 7,700 drug stores. On the other hand, through this transaction Catalyst Health will expand its PBM business and raise its membership to more than 18 million from the current level of 7 million.
Walgreen’s objective has been to use its cash balance strategically to enhance its business prospects. Earlier this month, the company completed the acquisition of drugstore.com for a total enterprise value of $409 million.
Through this deal, Walgreen’s online presence will be enhanced as it will be able to access more than 3 million online customers. Moreover, the company will be able to add up almost 60,000 more products to its already strong online offering
Walgreen’s strategy of store expansion coupled with operational acumen has made the company a leader in the retail drug store industry. The company has reduced organic new store openings to 4.0%−4.5% in fiscal 2010 from 9% in 2008 and is targeting to be within 2.5%-3.0% in fiscal 2011. This will have a positive impact on the company’s operating profit.
Our Recommendation
We are encouraged by Walgreen’s strategic decisions, including the sale of the PBM business and the acquisition of drugstore.com. Moreover, the benefits from the CCR rollout and rewiring initiative will be experienced gradually. Leveraging on its strong cash balance, the company is well equipped to pursue suitable acquisitions in future.
In order to make the best use of available funds, Walgreen has scaled down its stores opening target. We believe this decision will benefit the company as the new stores take 2 to 3 years to break even. However, Walgreen has been impacted over the past few quarters by high unemployment levels and lower discretionary spending.
We have a Neutral recommendation on Walgreen, which also corresponds to the Zacks #3 Rank (Hold) in the short-term.
CATALYST HEALTH (CHSI): Free Stock Analysis Report
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