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Walgreens Faces Uphill Battle to Snag AmerisourceBergen

A combination of Walgreens and drug distributor AmerisourceBergen would be fraught with valuation and operational challenges, says Morningstar's Vishnu Lekraj.

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Vishnu Lekraj: On Monday it was reported that Walgreens has approached AmerisourceBergen about a merger. While this may be a surprise to some analysts, we've expected this for a while, as Walgreens has purchased about 26% of AmerisourceBergen equity and has integrated a good deal of its operations with the drug distributor. 

However, we are uncertain that this deal makes a lot sense from the point of view of AmerisourceBergen. We've assigned the company a wide moat and believe it has deep competitive advantages moving forward. Walgreens, on the other hand, we believe has a no-moat business, and it will struggle over the long term. Thus, we believe a premium above $106 fair value estimate for AmerisourceBergen will be needed in order for this deal to be consummated. 

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