Walgreen Buys Drugstore.com for Twice Its Market Value

Walgreen Buys Drugstore.com for Twice Its Market Value
Walgreen Buys Drugstore.com for Twice Its Market Value

Still recovering from the punishment investors dished after it reported quarterly results two days ago, Walgreen (WAG) announced Thursday it is buying online retailer drugstore.com (DSCM) for an enterprise value of about $409 million, and an equity value of approximately $429 million, or $3.80 per share -- a 113% premium over the company's Wednesday's close.

"Our acquisition of drugstore.com today significantly accelerates our online strategy," said Walgreen President and CEO Greg Wasson. "This acquisition offers a unique opportunity that will provide us immediate access to more than 3 million savvy, online loyal customers, and will allow us to move even closer to our existing customers through relationships with new vendors and partners, adding approximately 60,000 products to our already strong online offering."

Other sites operated by drugstore.com that Walgreen is getting in the deal include Beauty.com, SkinStore.com and VisionDirect.com. Drugstore.com, which will maintain separate branding of its websites after the transaction closes, had more than $456 million in sales in 2010, and ranked as the eighth-largest e-tailer in the U.S. according to Internet Retailer magazine. Walgreen had $67 billion in sales.

Walgreen anticipates the transaction to be dilutive to fourth quarter 2011 earnings by approximately 3 cents per share due to transaction-related one-time costs, and will continue to be dilutive to earnings by 3 to 4 cents per share in fiscal 2012, and 1 to 2 cents per share in fiscal 2013.

As part of its retail focus, earlier this month, Walgreen announced that it was selling its pharmacy benefit management business to Catalyst Health Solutions (CHSI) for $525 million. The news was met with relief from investors, who pushed shares higher. Pharmacy benefit managers are third-party administrators of prescription drug claims. And, just over a year ago, it bought the New York drugstore chain Duane Reade and its 258 stores for nearly $1.1 billion.

Giving Walgreen a Competitive Edge

While Walgreen's profit climbed 10% in the last quarter and its same-store sales have been rising in recent months, the retailer said it expects pressure on earnings from government agencies' cutbacks. Walgreen operates nearly 7,700 retail pharmacies, and this latest acquisition builds on that renewed retail focus and its attempt to boost its online presence.

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"Walgreens has been focusing on organic growth for years, but hit a wall with this strategy and realized they had to do it via acquisition," Toon Van Beeck, senior analyst with IBISWorld told DailyFinance. "The acquisition of drugstore.com is in line with its focus on its core business, and gives Walgreen a competitive edge against CVS (CVS) and Rite Aid (RAD)."

"The online medication and cosmetic market is valued at $7 billion," Van Beeck added. "Walgreen wanted to hit the online and mobile market, so this is a fantastic opportunity. They can build a very profitable business in a growing market."

Walgreen indeed has also been offering a smartphone application that includes flu shot and store locators, and Express Refills by Scan, which allows consumers order refills instantly by scanning the bar codes on their prescription bottles.

"Some will have questions about the price -- a 110% premium," Van Beeck said. "While this is out of line with previous such deals, it's a small acquisition, which Walgreen can pay with cash. Walgreen will be able to leverage the online store and come back with online market sales and compete with the likes of Amazon.com (AMZN), Walmart (WMT) and Procter and Gamble (PG)."

Shares of drugstore.com today climbed 110%, while Walgreen shares enjoyed a 1% push.