Walgreens 2012 Annual Report Download - page 35

4. Acquisitions and Divestitures
In May 2012, the Company completed its acquisition of certain assets of BioScrip,
Inc.’s (BioScrip) community specialty pharmacies and centralized specialty and mail
services pharmacy business for $144 million plus inventory. Based on preliminary
purchase accounting, the acquisition added $92 million to goodwill and $50 million
to other intangible assets. The addition of BioScrip’s community specialty pharmacies
and centralized specialty and mail services pharmacy businesses advances
community pharmacy and brings additional specialty pharmacy products and
services closer to patients.
In February 2012, the Company purchased Crescent Pharmacy Holdings, LLC
(Crescent), an infusion pharmacy business, for $73 million, net of assumed cash.
The Crescent acquisition added $28 million to goodwill and $26 million to intangible
assets, primarily payer contracts. The acquisition is a strategic investment to expand
the Company’s infusion services in select California markets.
The aggregate purchase price of all business and intangible asset acquisitions,
excluding BioScrip and Crescent, was $259 million in fiscal 2012. These acquisitions
added $220 million to intangible assets, primarily prescription files. The remaining
fair value relates to immaterial amounts of tangible assets, less liabilities assumed.
Operating results of businesses acquired have been included in the Consolidated
Statements of Comprehensive Income from their respective acquisition dates
forward and were not material.
In fiscal 2011, the Company acquired drugstore.com, inc. (drugstore.com) for cash
proceeds of $398 million including the assumption of $17 million of debt. The
acquisition added $156 million to goodwill and $160 million related to intangible
assets. The addition of drugstore.com’s online business across its health, personal
care, beauty and vision categories better positions the Company as the most
convenient multichannel retailer of health and daily living needs in America.
Also in fiscal 2011, the Company completed the sale of its pharmacy benefit
management business, Walgreens Health Initiatives, Inc. (WHI), to Catalyst Health
Solutions, Inc. (Catalyst) in a cash transaction for $525 million, $40 million of
which was withheld in escrow. Net cash proceeds related to the transaction were
$442 million. The Company recorded a pre-tax gain in fiscal 2011 of $434 million
on the transaction. In fiscal 2012, the Company made a payment of $45 million
to Catalyst reflecting a net working capital adjustment to the sales price.
5. Equity Method Investments
Equity method investments as of August 31, 2012 and 2011, were as follows
(In millions, except percentages):
2012 2011
Carrying Ownership Carrying Ownership
Value Percentage Value Percentage
Alliance Boots $ 6,140 45% $ — —
Other equity method
investments 7 30% – 50% 7 30% – 50%
Total equity method
investments $ 6,147 $ 7
Alliance Boots
On August 2, 2012, the Company acquired 45% of the issued and outstanding share
capital of Alliance Boots in exchange for $4.025 billion in cash and approximately
83.4 million shares of Company common stock. The agreement also provides a
call option that allows the Company to acquire the remaining 55% of Alliance Boots
in exchange for an additional £3.1 billion in cash (approximately $5.0 billion using
August 31, 2012 exchange rates) as well as an additional 144.3 million Company
shares, subject to certain adjustments. The call option can be exercised beginning six
months prior to the third anniversary of the first step transaction (February 2, 2015)
and ending on the third anniversary (August 2, 2015). In the event that the Company
does not exercise the option, under certain circumstances, Walgreens ownership of
Alliance Boots will reduce from 45% to 42% in exchange for nominal consideration.
The call option was valued using a Monte Carlo simulation using assumptions
surrounding Walgreens equity value as well as the potential impacts of certain
provisions of the Purchase and Option Agreement dated June 18, 2012, by and
among the Company, Alliance Boots and AB Acquisitions Holdings Limited that are
described in the Form 8-K filed by the Company on June 19, 2012. The preliminary
allocation resulted in $6.1 billion of the total consideration being allocated to
the investment and $866 million being allocated to the call option based on their
relative fair values.
The Company accounts for its 45% investment in Alliance Boots using the equity
method of accounting. Investments accounted for under the equity method are
recorded initially at cost and subsequently adjusted for the Company’s share of the
net income or loss and cash contributions and distributions to or from these entities.
Because the underlying net assets in Alliance Boots are denominated in a foreign
currency, translation gains or losses will impact the recorded value of the Company’s
investment. The Company adopted a one-month lag in reporting equity income in
Alliance Boots and as a result, no earnings or translation adjustments were recorded
in fiscal 2012. The Company’s investment is recorded as “Equity investment in
Alliance Boots” in the Consolidated Balance Sheet.
As of August 31, 2012, the Company’s investment in Alliance Boots of $6.1 billion
exceeded its proportionate share of the net assets of Alliance Boots by $2.4 billion
based on preliminary estimates. This premium of $2.4 billion is recognized as part
of the carrying value in the Company’s equity investment in Alliance Boots.
The difference is primarily related to the fair value of Alliance Boots indefinite-lived
intangible assets and goodwill. The Company’s equity method income from the
investment in Alliance Boots will be adjusted in future periods to reflect the
amortization of fair value adjustments in certain definite-lived assets of Alliance Boots.
Based on its preliminary estimates, the Company expects the incremental amortization
expense associated with the Alliance Boots investment to be approximately $75 million
during fiscal 2013, with a larger amount recognized in the first quarter representing
the inventory step-up, which is amortized over the first inventory turn.
Other Equity Method Investments
Other equity method investments relate to joint ventures associated with the purchase
of Option Care, Inc. in fiscal 2007. These investments are included within other
non-current assets on the Consolidated Balance Sheet. The Company’s share of
equity income is reported within selling, general and administrative expenses in the
Consolidated Statements of Comprehensive Income.
Summarized Financial Information
Summarized financial information for the Company’s equity method investees
is as follows:
Balance Sheet (In millions)
At August 31, 2012 2011
Current assets $ 9,193 $ 12
Non-current assets 20,085 6
Current liabilities 7,254 2
Non-current liabilities 13,269 3
Equity (1) 8,755 13
Income Statement (In millions)
Year Ended August 31, 2012 (2) 2011 2010
Net revenue $ 37 $ 37 $ 31
Gross profit 17 19 11
Net income 2 5 2
Share of pre-tax income from investments
accounted for using the equity method (2) 1 2 1
(1) Equity includes $380 million related to non-controlling interests.
(2) The Company adopted a one-month lag in reporting its share of equity income in
Alliance Boots and as a result, no earnings were recorded in fiscal 2012.
2012 Walgreens Annual Report 33