Walgreens Boots Alliance Inc (NASDAQ:WBA) may be mulling over an acquisition of pharmaceutical distributor AmerisourceBergen Corp. (NYSE:ABC). So here we go again. With the ink still drying on the final slimmed-down deal that passes along nearly 2000 Rite Aid Corporation (NYSE:RAD), WBA stock holders now have another potential acquisition to handicap.
On Monday, the Wall Street Journal reported that Walgreens had made a takeover approach to AmerisourceBergen. Both companies have thus far declined to comment.
It’s not a terribly surprising development. Vertical and horizontal unions are the new norm. All companies in all healthcare business are struggling with ever-increasing costs that are starting to take a toll on their bottom as well as top lines.
Still, is this particular possibility one that current and would-be owners of WBA stock should really get excited about?
Some say no.
Add It To The List
Although neither the buyee nor the buyer have confirmed takeover talks, it’s certainly not a stretch to acknowledge the pairing is likely. Walgreens already owns about a fourth of AmerisourceBergen. And the two companies already have a close relationship; AmerisourceBergen will be doing a big part of Walgreens’ drug-buying through 2023.
There’s also a proverbial land-grab underway in the healthcare arena, mostly as a means of cost-containment.
The brewing marriage of rival drugstore chain CVS Health Corp (NYSE:CVS) and health insurer Aetna Inc (NYSE:AET) is the latest in a long string of vertical (and diagonal) deals, though not necessarily the highest-profile one. That honor arguably belongs to Amazon.com, Inc. (NASDAQ:AMZN), Berkshire Hathaway Inc. (NYSE:BRK.A,BRK.B) and JPMorgan Chase & Co. (NYSE:JPM).
The trio recently announced its intention to create a company to lower healthcare costs for its employees, though such a development would also lower each organization’s cost of providing healthcare benefits to its workers. Even without knowing exactly what the Amazon/Berkshire/JPMorgan joint venture will “do,” there’s no denying it’s a radical but necessary solution to solving a painful problem.
Yet, of all the ways to contain costs, Walgreens’ rumored buyout of AmerisourceBergen deal may be the least potent one.
The potential union of Walgreens Boots Alliance and AmerisourceBergen is — if nothing else — an interesting one.
Mizuho Securities USA LLC analyst Ann Hynes is one of those fans. She and believes that AmerisourceBergen can be sold for $107 to $109 per share or roughly ten times the company’s current EBITDA. She explains:
“Given ABC’s high-quality industry leading specialty distribution business, the high-end of the range is possible…despite some industry headwinds (e.g. drug pricing) given pricing trends appear to be stabilizing, coupled with ABC’s strong cash flow generation and industry leading specialty distribution business.”
Not every analyst sees a big upside, however. Jefferies LLC analyst Brian Tanquilut commented:
“[Walgreens Boots Alliance] has been openly discussing their intention of continuing to pursue vertical-integration deal opportunities, but acquiring the rest of [AmerisourceBergen], while financially rational, begs the question on what incremental strategic value the deal would bring, especially in light of recent moves by CVS and [Aetna] and even [Express Scripts] buying eviCore.”
Brad Haller, M&A director at West Monroe Partners, is further concerned that Walgreens already has plenty of work to do integrating Rite Aid stores into its network. Another deal could become a significant distraction and may not see immediate cost savings.
Bottom Line for WBA Stock
The rumored deal has a certain logic to it. Partnerships in the healthcare sector are the new norm. And it would be better to team up with the top-tier players before another party nabs them all.
But the question remains. What will WBA gain from this specific takeover, especially given their existing partnership with AmerisourceBergen?
The fact that WBA stock slumped a little despite the superficially good news is telling. It suggests investors aren’t exactly convinced the idea is the best one for the company right now.
Haller and Tanquilut voiced those investor concerns. Between their well-reasoned doubts and the market’s lack of enthusiasm, such a pairing is anything but a reason to look for higher highs from WBA stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.