Deerfield-based Walgreens set the stage to acquire its remaining 55 percent stake of Alliance Boots on Wednesday while rejecting an option to reincorporate overseas to save on corporate taxes, a move applauded by U.S. Sen. Dick Durbin and labor unions and punished — at least for a day — by investors.
Walgreens explored the tax implications of what is called a corporate inversion, but its board decided not to pursue the tax reduction strategy that has become controversial and was assailed by President Barack Obama as a tax dodge.
Walgreens was particularly vulnerable to criticism because it is a highly visible national retailer. While the company sought to avoid negative consumer and political reactions to the deal by not seeking to reincorporate in a nation with a lower corporate tax rate, investors thought otherwise: Walgreens stock plunged Wednesday to $59.21 a share, down $9.91 or 14.34 percent.
If approved by Walgreens shareholders, the deal should be completed by March. A new holding company, to be named Walgreens Boots Alliance, Inc. will be created and led by Walgreens chief, Greg Wasson, who will be president and CEO.
Alliance Boots, a pharmacy and beauty retail chain, was established in Switzerland in 2008. Iit is a subsidiary of a company based in Gibraltar, which is part of the United Kingdom.
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The new holding company will be headquartered in the Chicago area and Walgreens, a firm founded on Chicago’s South Side in 1901, will remain in north suburban Deerfield.
In an conference call early Wednesday, Wasson said the company did explore a corporate inversion, with the board engaging independent experts to analyze the legal, tax and other ramifications.
In rejecting inversion, Wasson said politics, public opinion and potential intense IRS scrutiny of the deal were factors. Wasson did not explain why the Walgreens team performing due diligence on the transaction did not anticipate these problems.
In the end, Wasson said that the deal with Alliance Boots would have to be restructured to permit an inversion and did not provide any details on how that seemingly major oversight came to be.
In any event, if Walgreens pursued an inversion, it could have left them in a worse position than if they “had not inverted at all, such as a protracted controversy with the IRS, possibly including litigation, which could go on for three to 10 years, and would significantly complicate and impede everyday tax and business planning,” Wasson said.
Discussing risks to inversion, Wasson said downsides included “possible dual taxation during the intervening years and payment of back taxes with interest and significant penalties. And third, somewhat harder to quantify but still quite significant, the potential consumer backlash and political ramifications, including the risk to our government book of business.”
The stock drop on Wednesday lowered the price tag on the transaction to about $13.8 billion: That’s $5.29 billion in cash at an exchange rate of $1.69 per British pound, plus 144.3 million shares of Walgreen stock valued at $8.544 billion as of closing on Wednesday.
Durbin had ramped up pressure on Walgreens not to move its headquarters — which would be mainly on paper — overseas to save on U.S. taxes.
At a news conference Wednesday at a Walgreens parking lot at Canal Street and Roosevelt Road, Durbin said the decision was best for the Walgreens’ long-term viability.
“There are people who are going to say, ‘You made the wrong decision. You’re supposed to maximize profits,’ ” Durbin said. But, he added, corporations that count on the largess of the U.S. — among them Walgreens, which relied on Medicare and Medicaid to provide 23 percent of its revenue last year — can’t have it both ways.
“They have to think twice about being in a position where they are not paying their taxes in this country, but expecting other taxpayer-supported institutions to sustain their business model,” Durbin said.
AFSCME, the public worker union, said Walgreens bowed to “intense pressure,” while the AFL-CIO said, “Walgreens heard us loud and clear.”
Oberweis calls Durbin a ‘bully’
While Durbin gained a quick victory, he came under attack by GOP Senate nominee Jim Oberweis for “bullying” the nation’s largest drug store chain.
“The Walgreen’s saga symbolizes Dick Durbin’s 32-year career in Washington. His bullying of Walgreen’s was a political stunt designed to help only one person: Dick Durbin. It didn’t create any jobs. It didn’t reform our job-killing tax code.” . . . Durbin was using government power to achieve partisan political gain. Instead of praise, Dick Durbin deserves our scorn.”
Durbin campaign spokesman Ron Holmes said in reply, “Only Jim Oberweis and the Swiss government would scorn today’s announcement. Sen. Durbin’s priority is keeping our jobs and tax dollars in America not looking for excuses for people who want to avoid paying their fair share of taxes.”
By attacking Durbin over Walgreens — and wading into the issue of tax avoidance strategies, Oberweis may resurrect a story from last year: Oberweis’ wife, Julie, became a Florida resident because of the “tax advantages” of the Sunshine State.”
Contributing: Brian Slodysko