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Stock Analyst Update

Who Wins in a Walgreens-Amerisource Hookup?

A vertical integration would benefit the no-moat retail pharmacy more than the wide-moat drug distributor.

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On Feb. 12, The Wall Street Journal reported that  Walgreens (WBA) recently approached  AmerisourceBergen (ABC) about acquiring the drug distributor's remaining equity that Walgreens does not already own. This transaction would vertically integrate the drug distribution and retail pharmacy spaces within the U.S. and falls in line with the strategy that Walgreens’ current management team has executed in Europe as it built its Alliance Boots business. While this news is still a press report, we believe the rumor has some substantiation. Over the past few years, Walgreens has partnered and integrated a significant portion of its operating assets and equity with Amerisource. Thus, a total merger seems like the next logical step for the retail pharmacy, particularly given the desire of the firm’s leadership to vertically integrate its business in the U.S. However, we believe Amerisource may not share this sentiment. We have assigned Amerisource a wide moat rating, while we assign Walgreens a no-moat rating, and we believe a vertical integration would benefit Walgreens more than Amerisource. Accordingly, we anticipate Amerisource would demand a significant premium above our $106 fair value estimate. We are leaving our moat ratings and fair value estimates in place, given that there has been no official announcement from either firm regarding a potential merger. 

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Vishnu Lekraj does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.