Walgreen Pressured to Up Buyback as Activist Wins Seats
By Cynthia Koons and Beth Jinks
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Sep 9, 2014 9:41 AM ET
Walgreen Co. (WAG) will
be pressured to boost a $3 billion share buyback that disappointed
investors last month after activist hedge fund Jana Partners LLC
struck a deal yesterday on three board seats at the U.S. drugstore
chain, said a person familiar with the matter.
Jana will use the positions to push for more of Walgreen’s capital to
be put toward repurchases, said the person, who spoke on condition of
anonymity because the discussions are private. The settlement, which
immediately added Jana founder
Barry Rosenstein to the
board, comes after Walgreen last month agreed to buy the rest of
European health and beauty chain Alliance Boots GmbH for $15.3
billion.
Jana and other investors have agitated for a more shareholder-friendly
use of Walgreen’s cash, and urged it to run more like Bern,
Switzerland-based Alliance Boots. Making those changes would mean
improving margins, increasing sales and boosting offerings such as
beauty products.
Walgreen shares gained less than 1 percent to $63.16 at 9:34 a.m. in
New York.
The shareholder pressure has created a power shift atop Deerfield,
Illinois-based Walgreen that has split authority with Alliance Boot’s
management. Alliance Boots Chairman Stefano Pessina, who joined the
board in 2012, will be executive vice chairman in charge of strategy
and acquisitions while a handful of Alliance Boots executives have
taken key roles.
Bigger Buyback
Walgreen shareholders, including Jana, are seeking to increase the
buyback by at least several billion dollars.
“The buyback was smaller than expected and, historically, they’ve kept
an extremely conservative balance sheet,” said Jeff Jonas, associated
portfolio manager at Gabelli Funds, a Walgreen shareholder, in an
interview before Jana won the board seats. Jonas said investors had
expected $5 billion to $10 billion in share repurchases.
Along with buying the rest of Alliance Boots, Walgreen last month cut
its adjusted earnings
forecast by about $2
billion and said it wouldn’t move its legal address abroad for a lower
tax rate.
After taking a position in Walgreen this year and engaging in months
of talks, Jana’s Rosenstein settled for a spot on Walgreen’s board and
his choice of a second director. Rosenstein runs the $11 billion
investment fund and, together with Walgreen, will choose a third
director if one of what will be 15 board seats opens, the pharmacy
retailer said. Jana
owned 1.2 percent of
Walgreen shares as of June 30, according to data compiled by
Bloomberg.
Credit Rating
Walgreen officials said in August that they didn’t offer a bigger
buyback because they wanted to reserve money for deals and protect the
company’s credit rating.
The company has acknowledged the feedback it received from unhappy
investors and said the board will “keep it in mind as it considers
future activity,” Michael Polzin, a Walgreen spokesman, said in a
telephone interview.
Rosenstein said he planned to use the role to be a voice for
shareholders. “I am eager to work constructively with Greg, Stefano
Pessina and the entire Walgreens board to help unlock greater value,’’
he said in a statement. Alliance Boots spokeswoman Laura Vergani
declined to comment on Jana’s involvement.
To contact the reporters on this story: Cynthia Koons in New York at
ckoons@bloomberg.net;
Beth Jinks in New York at
bjinks1@bloomberg.net
To contact the editors responsible for this story: Reg Gale at
rgale5@bloomberg.net;
Mohammed Hadi at
mhadi1@bloomberg.net
Drew Armstrong
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