Dealmakers of the Week: Wachtell's Brownstein and Roth

Dealmakers of the Week: Wachtell's Brownstein and Roth Andrew Brownstein and Benjamin Roth

DEALMAKERS

Andrew Brownstein, 60, and Benjamin Roth, 38, corporate partners in the New York office of Wachtell, Lipton, Rosen & Katz.

THE CLIENT

Deerfield, Ill.–based Walgreen Co., the largest drugstore chain in the United States.

THE DEAL

Walgreens announced on Wednesday that it would obtain full ownership of Swiss-based Alliance Boots GmbH through acquiring the stake it doesn’t already own in the European chain for $15.3 billion in cash and stock. In a departure from a recent trend of so-called inversions, where U.S. companies move overseas to lower their tax obligations, Walgreens said it would keep its tax address in Illinois after the deal’s completion.

THE DETAILS

The deal calls for Walgreens to pay $5.3 billion in cash and 144.3 million Walgreens shares worth $10 billion for the remaining 55 percent stake in Europe’s largest pharmacy retailer from Alliance Boots in the second step of a two-step deal. Walgreen had already purchased a 45 percent stake in the health and beauty retail chain in 2012 for $6.7 billion from private equity firm Kohlberg Kravis Roberts and Alliance Boots executive chairman Stefano Pessina.

The deal in 2012 gave Walgreens the option of buying the rest of Alliance Boots by August 2015, but with Wednesday’s deal, the deadline has been moved up to March 9, pending shareholder and regulatory approvals.

The senior management of the two companies would mingle once the deal is complete. Greg Wasson, the president and CEO of Walgreens, would continue his responsibilities, while Pessina would become executive vice chairman in charge of strategy and mergers and acquisitions.

Allen & Overy acted as legal counsel to Walgreens along with Wachtell. Paris-based Darrois Villey Maillot Brochier advised Alliance Boots, while Simpson Thacher & Bartlett took the lead for KKR. Gibson, Dunn & Crutcher represented Lazard, the financial adviser to Walgreens.

THE BIG PICTURE

The merger would create not only the first global pharmacy-led health enterprise but also one of the world’s largest drugstore and pharmacy retailers. It would operate about 11,000 stores in 10 countries, as well as become the world’s biggest pharmaceutical wholesale and distribution network that includes more than 370 distribution centers.

Much has been made of Walgreens’ decision not to go the inversion route, as so many other U.S. companies have. Inversions allow U.S. companies to avoid the 35 percent domestic corporate tax—the highest corporate tax in the world—in favor of lower tax rates in countries like Ireland and the U.K. According to Bloomberg, an inversion could have saved Walgreens at least $4 billion over the course of five years. Walgreens said that it would strive to control costs instead, aiming to achieve $1 billion in savings by fiscal year 2017.

But Roth noted that under the existing terms of the transaction laid out in the first step of the two-step deal in 2012, Walgreens didn’t qualify for an inversion because there is no foreign company holding a 20 percent stake in the combined company. (In order to qualify for a tax inversion, the combined company must have a minimum 20 percent foreign ownership.) When asked if Walgreens could have structured the deal differently so as to qualify for an inversion, Roth and Brownstein said that the plans had already been laid out in 2012.

In its company statement, Walgreens maintains that it didn’t find an inversion appealing because of the intense scrutiny it would receive through the Internal Revenue Service, as well as an awareness of its “unique role as an iconic American consumer retail company.”

THE BACKSTORY

Brownstein, who became a partner at Wachtell in 1985, helped the firm cement its relationship with Walgreens as a client. After he advised the company when it rebuffed a takeover offer by the Haft family in 1988, Walgreens turned to Wachtell on a number of corporate and litigation issues. Roth began advising Walgreens about six years ago, and he and Brownstein jointly worked on a series of Walgreens acquisitions, including the company’s $760.5 million purchase of Option Care in 2007, its $1.1 billion purchase of Duane Reade Inc. in 2010 and the $6.7 billion buy of the 45 percent stake of Alliance Boots in 2012.

Brownstein said the firm had intensified its work on the remaining Alliance Boots stake over the past four months. He noted that most of the fundamental terms of the latest transaction had been established when the first part of the deal took place in 2012. “The basic change was the acceleration of the execution of the purchase,” Brownstein said.

ON CLOSING

The deal is still waiting for regulatory approvals and the consent of shareholders but Roth said it should progress as expected.

Brownstein said that because the economic terms of the deal had already been mapped out in 2012, when Walgreens purchased the 45 percent stake in Alliance Boots, the second part of the deal primarily focused on how the senior management of the combined company would be structured.

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