DEALMAKER

Andrew Brownstein, 58, a corporate partner in the New York office of Wachtell, Lipton, Rosen & Katz.

THE CLIENT

Deerfield, Illinois–based Walgreen Co., whose $72 billion in sales last year make it the largest drugstore chain in the United States.

THE DEAL

Walgreens said Tuesday that it will pay $6.7 billion to acquire a 45 percent stake in European pharmacy group Alliance Boots GmbH, with an option to purchase the remainder of the company by 2015.

THE DETAILS

Under the terms of the agreement, Walgreens will pay $4 billion in cash and $2.7 billion in Walgreens stock for the initial 45 percent stake in Alliance Boots. The stake is being purchased from private equity firm Kohlberg Kravis Roberts (KKR) and Alliance Boots executive chairman Stefano Pessina, who joined forces with KKR to purchase the company in 2007. The transaction is expected to close by September 1, pending regulatory approval.

Once the sale of the 45 percent stake is completed, Walgreens CEO Gregory Wasson and three other Walgreens executives will join the Alliance Boots board of directors. At the same time, Pessina and KKR director Dominic Murphy will join the Walgreens board.

In 2015, Walgreens will have right to exercise an option to purchase the remaining 55 percent stake in the target company in a follow-up transaction that could be worth roughly $9.5 billion, depending on fluctuation in Walgreens stock prices and foreign exchange rates.

THE BIG PICTURE

The tie-up, which could eventually create one of the world’s largest drugstore and pharmacy retailers, allows Walgreens to significantly expand its operations overseas. Forbes‘s Bruce Japsen speculated this week that the deal could also boost the combined pharmacy chain’s ability to compete with major drug companies by touting generic drug offerings around the world.

In announcing the deal, the two companies described the deal structure delaying Walgreens’s full takeover of the target by three years as “allowing time for thoughtful integration planning.” The companies expect synergies in several areas, including prescription drug and retail sales, which could result in $1 billion in combined annual savings by the end of 2016. And while Walgreens seems intent on completing the purchase in three years, the structure allows the company to keep its options open.

THE BACKSTORY

Brownstein became a partner at Wachtell in 1985 and helped bring Walgreens into the firm as a client a few years later. He advised the company in fending off a takeover attempt by the Haft family, which controlled Dart Group Corp., in 1988.

Since then, Wachtell has served as special counsel to Walgreens on a variety of corporate and litigation issues, with the deal for the Alliance Boots stake representing the largest transaction in Walgreens’s more than 110-year history. Other transactions on which the firm advised Walgreens include the $1.1 billion purchase of Duane Reade Inc., in 2010.

“Over the years, we get involved from time to time in special projects, acquisitions,” Brownstein says. “We advise generally about the M&A environment, and so forth. . . . We’re in touch with [Walgreens] on a regular basis and advise with respect to current trends in M&A and corporate governance.”
 
ON CLOSING

Some major transactions come together in a matter of weeks or months, but the complexity and magnitude of a deal sometimes necessitates a more deliberate pace. That was the case in this instance, Brownstein says. While Walgreens reached out to him more than a year ago to start work on a possible acquisition of the Alliance Boots stake, the pace of negotiations didn’t pick up until a few months prior to signing.

“It’s a transformative transaction for both companies,” Brownstein says. “So, I think that both companies were working on it fairly steadily for most of the last year.”

The negotiations needed to account for both the potential full takeover and the initial 45 percent stake purchase, the governance structure for the companies in the three-year interim period that ends in 2015, and what happens if Walgreens does not exercise its option (the company’s stake would be reduced to 42 percent).

The process was further complicated by the number of parties involved. Alliance Boots’s two main shareholders—KKR and Pessina—each have their own counsel, Simpson Thacher & Bartlett and Paris firm Darrois Villey Maillot Brochier, respectively. And, Allen & Overy also provided advice to Walgreens—taking the responsibility of diligence and regulatory aspects overseas, while Wachtell led on negotiating and structuring the principal transaction terms.

“It was a complex and very, very interesting transaction to work on,” Brownstein says. “It’s really like working on multiple transactions at the same time.”