Walgreen Company (WAG) announced that it will acquire New York-based Duane Reade, giving WAG a leading position in the nation’s biggest pharmacy market. At a price of $1.075 billion, including the assumption of Duane Reade’s debt, WAG will acquire Duane Reade’s 257 stores, which generate the highest sales per square foot in the retail drugstore industry nationwide.
WAG expects the transaction to be dilutive to earnings in the first 12 months after closing before becoming accretive going forward. WAG anticipates meaningful distribution and purchasing efficiencies as well as back-office synergies that could amount to $120 million and $130 million in the third year after closing.
The true value of Duane Reade is their presence around the lucrative New York City market – no doubt about it. From what I have read, everyone seems to hate Duane Reade’s staff and customer experience, but the chain also seems to carry to unambiguous title of most convenient drug store in the market place. This makes the company a perfect fit for WAG’s strategy.
WAG has used its free-standing stores in prime locations as the backbone of their growth strategy for over the past decade – WAG has a store within five miles of 70% of U.S. households – benefiting from the fact that people fill their prescriptions where it is most convenient. Because New York real estate is difficult (expensive) to obtain, an acquisition like this is the only way to build a powerful position in New York.
It’s also worth noting that the acquisition represents another step away from its historical focus on organic growth. After years of rapid expansion, WAG has significantly slowed new store openings to focus on remodeling and scrutinizing its merchandise to enhance consumer experience and convenience. Management’s goal is to increase their customers’ average basket size by one item.
I think this is a nice move by WAG, but it doesn’t dramatically change my opinion of the company. If they ever consider purchasing or signing a long-term deal with a pharmacy benefit manager (PBM), then that would be a different story.
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Peter J. Lazaroff, Investment Analyst
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