Walgreen encounters uncommon inversion boundary

August 6, 2014

By Kevin Allison

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Walgreen has encountered a limit to inversion logic. The drugstore chain will keep flying the American flag even after agreeing to buy the rest of Swiss-based Alliance Boots for about $15 billion. A backlash against corporate emigration may have affected Walgreen’s decision, but harder numbers probably mattered more.

The U.S. aspirin-to-diapers merchant began its cross-border expedition in 2012, when it struck a two-stage deal to acquire its UK counterpart. Since executing the first step, when it bought 45 percent of Alliance Boots, relocating domiciles to save on taxes has become de rigueur. Some shareholders spotted an opportunity for Walgreen to join the diaspora when it exercised its option to take full control.

There were some clear advantages for the Illinois-based company. Its effective tax rate last year was 37 percent, compared to 16 percent for Boots. Walgreen nevertheless demurred. The decision coincided with lowered financial targets for the merged company, which combined to erase nearly $10 billion of the company’s market value on Wednesday. Walgreen also replaced its chief financial officer earlier in the week.

A groundswell of resentment from politicians who are vocally calling such changes of address unpatriotic was one factor the company cited for retaining its U.S. corporate citizenship. And while fears of bad public relations or retribution from authorities might be growing, Walgreen’s case appears to be more an exception than the rule.

For one thing, inversions only exempt companies from paying U.S. taxes on overseas profit. That means the savings for Walgreen, with its more than 8,000 U.S. stores, wouldn’t be as robust as for, say, AbbVie. The pharmaceuticals group, which generates about half its sales abroad, is in the process of buying Shire for $55 billion and calling the Channel Island of Jersey instead of Chicago home.

What is more, Walgreen said its lawyers and accountants discovered that its already drafted deal with Boots wouldn’t have qualified for an inversion under existing rules. Restructuring the transaction might have opened the company to protracted litigation and potentially even double taxation. The circumstances suggest that Walgreen had rather specific limitations to leaving U.S. shores.

Public shaming might work up to a point in some industries. Unless and until Congress acts, however, investors should expect more tax arbitrage-motivated M&A.

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