Walgreen (WAG) has tax inversion on its mind as it contemplates a move to Switzerland, contingent on its planned purchase of 55% of the Switzerland-based Alliance Boots GmbH. The move is partly the result of the efforts of a high-profile hedge fund group, including Jana Partners LLC. Jana Partners met Walgreen President and CEO, Gregory Wasson, and Alliance Boots Chairman, Stefano Pessina, in Paris to highlight the potential tax benefits Walgreen could realize by choosing to relocate overseas. The savings will free up cash to be used to enhance value for the company’s shareholders. However, the largest drug retailing chain of US may face serious regulatory hurdles erected by the Obama Administration, which is calling for an immediate congressional hearing to pass legislation to limit inversion.
In 2012, Walgreen purchased a 45% stake in Alliance Boots for $6.7 billion with the intention of expanding its geographic footprint to buoy its slow revenue growth rate in the US. The company was also interested in a Walgreen-Alliance Boots merger to procure better pricing for generic drugs.
Walgreen’s acquisition of Alliance Boots will result in about 33% of its profits coming from outside North America. The profits earned overseas will be subject to a 35% tax rate if repatriated to the US, in the event that Walgreen does not relocate. Relocation of the company’s headquarters means that income earned abroad will be subject to a leaner Swiss tax rate of 17.9%.
Deerfield, Illinois-based Walgreen generates almost all of its revenues from its 8,700 locations in the US, a market now saturated – roughly 75% of Americans live in a five-mile radius to a Walgreen pharmacy. As a result, the company needs to consider ways to generate higher revenues in the future, and expansionary policies to cater to international markets – which bear the potential to generate higher revenues for the company.
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