Boots Opticians is set to become a part of America's largest pharmacy chain after Walgreen agreed a partial buyout of Alliance Boots last week. The deal represents Walgreen's entry into both international markets and optics but far-reaching changes to the Boots Opticians business seem unlikely, as Joe Ayling reports
DONE DEAL: Boots' Stefano Pessina (left) with Gregory Wasson, president and CEO of Walgreen
Walgreen's $6.7bn (£4.3bn) investment in Alliance Boots makes the US company a major player in the optical world. It gives Walgreen a 45 per cent holding in Boots and a share in the company's 625 optical practices, of which around 185 operate on a franchise basis.
Indeed, should Walgreen exercise its option to buy the remaining 55 per cent of Boots for £3.1bn in three years time, rival pharmacy and optical chains in the UK would have good reason to be looking over their shoulders.
The business synergies between Boots and Walgreen are obvious, with both firms distributing and selling a similar mix of health, beauty and pharmaceutical products. Indeed, the partnership forecasted it would deliver savings of $100m-$150m in the first year alone and $1bn by the fourth year, which would fund significant expansion.
However, in other areas Walgreen could be accused of dipping its toe in the water because, as despite having 7,890 Walgreens stores in the US it is lacking experience in overseas markets and operating optical practices, although it did acquire VisionDirect.com last year, which provides online contact lens replacement sales for large optical chains in the US. Boots, meanwhile, operates 3,330 health and beauty retail stores in 11 countries and supplies medicines through 370 distribution centres in 21 countries.
The deal sees a second major investment at Alliance Boots in five years after private equity firm Kohlberg Kravis Roberts & Co and Alliance Boots executive chairman Stefano Pessina snapped up the firm in 2007.
All of the noises from Deerfield, Illinois, suggest a commitment to leaving Boots the way it is, with an emphasis on protecting jobs and Boots' headquarters in Nottingham. 'Given the complementary geographic footprints of Walgreens and Alliance Boots, there are no plans for job reductions at either company as a result of the transaction,' a statement said.
Vowing to keep jobs is music to the ears of Boots staff and shareholders, who might otherwise be mindful of redundancies at another household British brand, Cadbury, under American owners Kraft. Walgreen would be keener to emulate the headlines generated by Wal-Mart's takeover and expansion of Asda at the turn of the century.
Although shares in Walgreen fell on news of the investment after a mixed response from analysts, they have since rallied.
Verdict retail analyst Carly Syme said: 'This partnership is a great move for both companies - Alliance Boots and Walgreen both have strong brands in their territories as well as similar customer profiles, so naturally make a good fit. As well as providing cost savings in the supply chain and greater purchasing power, the deal also offers many opportunities for both the businesses in terms of cross selling.'
Pessina told analysts: 'I am sure this deal will be highly successful because it is creating a new standard for the industry. Other people will have to follow us because the impact it will have on the market will be such that everybody will have to follow us, but we will have the advantage of being the first mover.'
Pessina was speaking at a conference call dominated by talk of emerging markets, synergies and procurement, but the lack of discussion about Boots Opticians was more indicative of the sheer scale of pharmacy operation than anything else.
However, expansion plans under Walgreen extend to optical practices, meaning there is a distinct possibility of Boots Opticians openings in Europe and the US in the future.
Boots Opticians would no doubt have been an attractive part of the deal for Walgreen and the work done since 2009's merger with Dollond & Aitchison is unlikely to be interrupted. Future strategy will also be guided by De Rigo, which has a 42 per cent stake in Boots Opticians, resulting from that merger.
Speaking to Optician prior to the Walgreen deal at Alliance Boots' financial results last month, the company's chief executive of health and beauty Alex Gourlay showed clear signs that the strategic path was laid.
He said: 'One of the things we have done in the past 18 months is invested in value and looked at our price position in the marketplace. The marketplace has changed quite a lot in the last three years with the entering supermarkets, plus you've also got Specsavers, Vision Express and the independents and the combination of Boots and D&A.
'We decided that we'd invest in both the glasses offer and also in contact lenses. What we've seen on the back of this investment is improved conversion coming through. One of the drivers of the sales number is that our average transaction value is down slightly but our conversion is up. So we are having more people coming for eye tests and more of these people are staying in Boots Opticians to buy their glasses and if you're spending £150 on a transaction then you're going to be aware of what you're paying.'
Broadening the range of optical products sold at Boots and connecting with healthcare were also priorities at Boots Opticians.
With new investment and the formation of a giant healthcare partnership, the multiple looks well-placed to continue this momentum with plenty of backing and few distractions.
● Additional reporting by Simon Jones.