Wednesday, February 17, 2010

Walgreen's puts cash to good use in Duane Reade acquisition (WAG)

Walgreens announced earlier this morning that they would buy privately held Duane Reade for $1.075billion, which includes the assumption of $457million in debt.  

At first glance this looks to be a fantastic deal for Walgreens at a great price.  Not that it's a game-changer, boosting the store base just 3.7%, but still...
Walgreen Co. (NYSE: WAG - News)(NASDAQ: WAG - News) and New York-based drugstore chain Duane Reade Holdings, Inc. today announced a definitive agreement under which Walgreens will acquire Duane Reade from affiliates of Oak Hill Capital Partners in a cash transaction for a total enterprise value of $1.075 billion, which includes the assumption of debt.
The transaction is subject to customary conditions, including receiving regulatory approvals and would include all 257 Duane Reade stores located in the New York City metropolitan area, as well as the corporate office and two distribution centers. Walgreens will fund the purchase with existing cash and anticipates the transaction will close in its current fiscal year, which ends Aug. 31.
“Duane Reade is a compelling strategic acquisition that will immediately provide Walgreens with a leading position in the largest drugstore market in the U.S.,” said Walgreens President and CEO Greg Wasson. “In addition, Duane Reade’s recent initiatives in urban retailing, customer loyalty and private brand products support and accelerate Walgreens strategy to enhance the customer experience in our network of more than 7,100 stores across the country.”

Based on the full purchase price and Duane Reade's 2009 sales of $1.8billion, it looks like Walgreens paid about .55times sales for Duane Reade, versus it's own valuation of about .52 times pharmacy sales.  Walgreens has a few non-comparable operations that should be excluded in a comparison.  Duane Reade's locations, according to the press release, boast the nation's "highest sales per square foot in the retail drugstore industry nationwide."
In the management presentation to shareholders, the "footprint" slide shows what a nice entry this will be for Walgreens into the Manhattan market.
Not a blockbuster deal, but a great use of cash that according to management is "consistent with the capital allocation objectives we outlined last fall, which included investing in strategic opportunities that reinforce the company’s core strategies and meet return requirements."  Well done.

Copyright 2010 AlphaNinja

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