Barclays On Walgreen - Investors in The Driver's Seat Upgrading To Overweight

Equity Research
Consumer | U.S. Food & Drug Retailing

18 June 2014

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies
covered in its research reports. As a result, investors should be aware that the firm may have a
conflict of interest that could affect the objectivity of this report.
Investors should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 48.
Walgreen Co.
Investors in the Drivers Seat;
Upgrading to Overweight
Walgreens management and Board appear to have begun to internalize the
constructive criticisms of increasingly vocal shareholders. We believe the Board is
actively considering changes that could materially boost earnings and the stock price.
Potential initiatives include reducing expenses and optimizing the capital structure,
which can be implemented at any time, as well as inverting the existing corporate
structure to achieve tax savings, which is a more complicated undertaking. We are
upgrading Walgreens to Overweight from Equal Weight and increasing our price target
to $92 (ex-inversion) from $56, representing a 26% increase from the June 16 close.
We believe investors are in the drivers seat and see a near-term catalyst for WAG
shares. Our review of Walgreens bylaws suggests that shareholders can replace the
board relatively quickly if it appears that value-creating steps are not being planned.
Proposals addressing shareholder-friendly actions may be included in the proxy filing
for Phase 2 of the Alliance Boots transaction in late summer or early fall of this year.
Our model suggests incremental opportunities will drive earnings in excess of FY16
consensus, even assuming conservative core growth and excluding inversion. We
believe cost reduction initiatives and adoption of a more balanced capital structure
could drive FY16 EPS of $5.51, 11% above the consensus estimate of $4.97, even
before accounting for potential FY16 inversion accretion of $0.99.
We expect considerable upside as WAG identifies and executes against the
opportunities we have cataloged, despite the strong run the shares have had in
anticipation of change (WAG +46% over the last 12-months vs. the S&P 500 +19%).
Our price target of $92 represents a 15x multiple on our FY18E EPS of $7.79,
discounted back three years at Walgreens cost of equity (9%). If WAG achieves
inversion, we project FY18 EPS of $9.05, implying upside to $108 (acknowledging that
inversion will likely cause domestic Walgreens shareholders to incur capital gains).
WAG: Quarterly and Annual EPS (USD)
2013 2014 2015 Change y/y
FY Aug Actual Old New Cons Old New Cons 2014 2015
Q1 0.55A 0.63A 0.63A 0.72A N/A N/A 0.85E 15% N/A
Q2 0.91A 0.91A 0.91A 0.91A N/A N/A 1.06E 0% N/A
Q3 0.77A 0.91E 0.93E 0.94E N/A N/A 1.04E 21% N/A
Q4 0.71A 0.85E 0.87E 0.86E N/A N/A 0.99E 23% N/A
Year 2.93A 3.31E 3.35E 3.44E 3.95E 4.23E 3.92E 14% 26%
P/E 25.0 21.9 17.3
Source: Barclays Research.
Consensus numbers are from Thomson Reuters

Stock Rating OVERWEIGHT
from Equal Weight
Industry View NEUTRAL
Unchanged
Price Target USD 92.00
raised 64% from USD 56.00

Price (16-Jun-2014) USD 73.29
Potential Upside/Downside +26%
Tickers WAG

Market Cap (USD mn) 69943
Shares Outstanding (mn) 954.33
Free Float (%) 92.27
52 Wk Avg Daily Volume (mn) 5.9
Dividend Yield (%) 1.7
Return on Equity TTM (%) 13.73
Current BVPS (USD) 21.78
Source: Thomson Reuters

Price Performance Exchange-NYSE
52 Week range USD 75.84-43.31
Link to Barclays Live for interactive charting

U.S. Food & Drug Retailing
Meredith Adler, CFA
1.212.526.7146
meredith.adler@barclays.com
BCI, New York
Sean Kras
1.212.526.1057
sean.kras@barclays.com
BCI, New York
U.S. Health Care Distribution & Technology
Eric Percher
+1 212 526 5496
eric.percher@barclays.com
BCI, New York
Onusa Chantanapongwanij, M.D.
+1 212 526 6166
onusa.chantanapongwanij@barclays.com
BCI, New York

Barclays | Walgreen Co.
18 June 2014 2
U.S. Food & Drug Retailing Industry View: NEUTRAL
Walgreen Co. (WAG) Stock Rating: OVERWEIGHT
Income statement ($mn) 2013A 2014E 2015E 2016E CAGR Price (16-Jun-2014) USD 73.29
Price Target USD 92.00
Why Overweight? We expect WAG's management to
take steps that will boost the earnings power and
value of the company, including cutting expenses,
leveraging owned generic brands, and optimizing the
capital structure. In addition, the combination with
Alliance Boots and the partnership with
AmerisourceBergen give the company greater buying
clout and new avenues of growth.
Upside case USD 108.00
If a tax inversion can be implemented, WAG's EPS will
be higher and even at the same multiple, the stock
could increase. Our upside case represents 15x our
adj. cash FY18 EPS forecast of $9.05, discounted back
to FY15 at the 9.2% cost of equity.
Downside case USD 60.00
If various initiatives are not implemented smoothly or
the external environment deteriotes, EPS will be
lower. Our downside scenario represents 14.0x our
adjusted cash FY16 EPS forecast of $4.65, discounted
back one year at a 9.2% cost of equity.
Upside/Downside scenarios
POINT Quantitative Equity Scores
Source: POINT. The scores are valid as of the date of this
report and are independent of the fundamental analysts'
views. To view the latest scores, please go to the equity
company page on Barclays Live.
Revenue 72,217 76,146 79,121 125,224 20.1%
EBITDA (adj) 5,331 6,011 7,262 10,847 26.7%
EBIT (adj) 4,048 4,683 5,867 8,393 27.5%
Pre-tax income (adj) 3,849 4,413 5,724 7,339 24.0%
Net income (adj) 2,437 2,707 3,546 4,783 25.2%
EPS (adj) ($) 2.93 3.35 4.23 5.51 23.4%
Diluted shares (mn) 955.2 963.1 963.1 967.5 0.4%
DPS ($) 1.10 1.26 1.36 1.73 16.3%

Margin and return data Average
EBITDA (adj) margin (%) 7.4 7.9 9.2 8.7 8.3
EBIT (adj) margin (%) 5.6 6.1 7.4 6.7 6.5
Pre-tax (adj) margin (%) 5.3 5.8 7.2 5.9 6.1
Net (adj) margin (%) 3.4 3.6 4.5 3.8 3.8
ROIC (%) 10.1 10.9 13.3 12.5 11.7
ROE (%) 13.4 14.2 16.7 21.0 16.3
ROA (lease adjusted) (%) 9.5 9.8 10.7 8.8 9.7

Balance sheet and cash flow ($mn) CAGR
Tangible fixed assets 12,138 12,271 16,137 15,514 8.5%
Intangible fixed assets 2,410 2,455 10,225 10,225 61.9%
Cash and equivalents 2,106 2,568 1,952 3,099 13.7%
Total assets 35,481 38,020 69,374 71,192 26.1%
Short and long-term debt 5,047 4,516 14,168 25,760 72.2%
Total liabilities 16,027 16,386 36,124 48,469 44.6%
Net debt/(funds) 2,941 1,948 12,215 22,661 97.5%
Shareholders' equity 19,454 21,633 33,250 22,723 5.3%
Change in working capital 667 357 -52 -67 N/A
Cash flow from operations 4,301 3,855 4,502 7,267 19.1%
Capital expenditure 1,212 1,391 1,424 1,833 14.8%
Free cash flow 3,089 2,464 3,078 5,435 20.7%

Valuation and leverage metrics Average
P/E (adj) (x) 25.0 21.9 17.3 13.3 19.4
EV/EBITDA (adj) (x) 13.8 12.1 11.4 8.6 11.5
Equity FCF yield (%) 4.3 4.0 5.1 24.1 9.3
P/Sales (x) 1.0 0.9 0.9 0.6 0.8
P/BV (x) 3.6 3.3 2.1 3.1 3.0
Dividend yield (%) 1.5 1.7 1.9 2.4 1.9
Adj debt/EBITDAR (x) 3.1 2.8 3.1 3.7 3.2

Selected operating metrics Average
Same store sales growth (%) -0.7 4.7 3.3 3.6 2.7
Square footage growth (%) 2.4 0.8 0.9 0.9 1.2
Inventory growth (%) -2.6 5.4 44.7 3.9 12.8
Capex/sales (%) 1.7 1.8 1.8 1.5 1.7
Source: Company data, Barclays Research
Note: FY End Aug

Value
Quality
Sentiment
Low High
18 June 2014 3
TABLE OF CONTENTS
Executive Summary: ...(Page 4)

The Pathway for Change: A review of Walgreens Board structure and bylaws as well as the mechanisms which shareholders
may utilize to exert pressure on the Board and the timing of potential Board proposals(Page 14)

Walgreen Pro Forma Model FY16-FY18: Our new Walgreens model, including stand alone projections for FY14-FY16 core and
synergy contributions and consolidated projections extending to FY18 (Page 17)

Synergy Expectations: An examination of both generic and non-generic synergy contributions. We leverage our proprietary
generic market model to provide a forecast of generic synergies extending through FY18(Page 19)

The Almus Opportunity: We provide an overview of the Almus private-label opportunity, leveraging our generic model to
determine sales potential and working with our global generics research team to estimate private label profitability(Page 21)

AmerisourceBergen Contribution. Projections for the timing and size of equity income accruing to Walgreens from its
ownership stake in AmerisourceBergen (Page 23)

Managing Costs More Effectively. A review of Walgreens cost structure and the sizable opportunities for more effectively
managing corporate and regional overhead(Page 26)

Leveraging the Balance Sheet. In partnership with our Barclays Credit Research counterpart, we examine the extent to which
Walgreens can increase leverage while maintaining its investment grade rating and forecast the potential benefits of leveraged
recapitalization (Page 30)

Inversion Benefits Defined. An overview of inversion requirements and benefits, including our projections for cash tax savings
enabled by inversion(Page 34)

Qualifying for Inversion. We consider the modifications that must be made to the current Walgreens - Alliance Boots
agreement to meet the requirements for inversion and audit the potential mechanisms for achieving these changes(Page 34)

Appendix
WAG/AB/ABC Overview. A brief history of the Walgreens/Alliance Boots/AmerisourceBergen relationships(Page 43)

Tax Matters. An overview of deferred profit and transfer pricing(Page 45)

18 June 2014 4
EXECUTIVE SUMMARY:
We are upgrading Walgreens to Overweight from Equal Weight and increasing our price
target to $94, from $56. Walgreens commentary at the Barclays Retail & Consumer
Conference on April 30
th
suggests management and the Board have begun to internalize
criticisms leveled by increasingly vocal shareholders and are actively considering changes
that extend beyond the much discussed possibility of inversion to include easier to achieve
(but perhaps equally valuable) opportunities related to the companys cost and capital
structure.
Our Overweight rating is predicated on opportunities available under the current
Walgreens-Alliance Boots partnership agreement, independent of potentially large
inversion benefits. We believe incremental cost reduction initiatives and adoption of a
more balanced capital structure (among other items) could drive FY16 EPS of $5.51, 11%
above the consensus estimate of $4.97, even before accounting for potential inversion
benefits which could drive FY16 EPS to $6.56 (cost reduction and leveraged recapitalization
result in $0.64 and $1.16 in incremental EPS in FY16 and FY18, as compared to inversion
which results in $1.05 and $1.31, respectively).
While the current Walgreens - Alliance Boots transaction structure will not qualify for
inversion, we believe the most logical corporate structure for a combined Walgreens
and Alliance Boots would involve inversion. We outline possible paths for altering the
transaction to constitute an inversion. Achieving inversion would drive our EPS estimates to
$6.56 in FY16, $7.88 in FY17 and $9.11 in FY18. However, given the uncertainty and
complexity inherent to changing terms and structure as well as potential political pressures,
we assume no inversion benefit in our price target.
We are increasing our price target to $92 from $56. Our 12-month price target of $92 is
arrived at by applying an earnings multiple of 15x to our FY18 estimate of $7.79 and then
discounting the result back three years at Walgreens cost of equity of 9.2%. Should the
company achieve inversion, we project FY18 EPS of $9.11, and foresee upside to $108.
However, we note that the domestic Walgreens shareholders are likely to incur capital gains
as a result of inversion.

FIGURE 1
Walgreens Pro Forma Earnings Projections

Source: Barclays Research

$3.35
$4.23
$5.51
$6.71
$7.79
$6.50
$7.83
$9.05
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
$8.00
$9.00
$10.00
FY14 FY15 FY16 FY17 FY18
EPS
Basecase withInversion
18 June 2014 5
Pathway Leads to Incremental Upside
In our opinion, managements recent commentary, which suggests a pathway for
Walgreens management and board members to work constructively with increasingly
active shareholders, represents an inflection point in the Walgreens story. We have
been highly encouraged by the recent statements of Walgreens management
acknowledging the need to address the companys cost structure and indicating that they
are examining opportunities to optimize capital structure and maximize tax efficiencies.
We have identified three factors which we believe are driving the change in tone:
1. Increasing influence of Alliance Boots Executive Chairman Stefano Pessina, who owns
8% of outstanding WAG shares after Phase 1 and will own approximately 17%-18%
when the transaction is closed. Mr. Pessina has demonstrated a more aggressive
approach to optimizing cost structure, leverage and tax efficiencies than has
Walgreens current board and management.
2. A Board structure and bylaws that give little protection to current members, providing a
potent incentive for the Board to be responsive to shareholder concerns. Our review of
Walgreens bylaws suggests that if investors conclude that the current board and
management team are unlikely or incapable of taking the steps necessary to increase
shareholder value, shareholders are well positioned to replace them quite quickly.
3. Core Walgreens and Alliance Boots operational performance is running below the run
rate needed to achieve FY16 guidance provided when the transaction was announced.
This puts increasing pressure on management to take action could help to offset
softness in core operational performance.
While Mr. Pessinas experience and reputation have been well known for some time, we
believe increasing shareholder engagement and extremely weak corporate defenses have
served as a wakeup call for the Board. Meanwhile, Alliance Boots FY14 (end March) results
provided another data point that core operations are running below the levels anticipated at
the time of the announcement, though better-than-projected synergies have so far helped
to offset this shortfall. We believe these factors all played a role in leading to the shift in
tone from the companys March 25th earnings conference call to our April 30th Retail and
Consumer Conference.
We think it is likely that Walgreens board and management are currently formulating
proposals for completion of the Walgreens and Alliance Boots combination, which may
significantly alter the terms and structure of the transaction. Specifically, the companys
statements at our April conference lead us to believe that Walgreens is considering
adjusting the deal terms to optimize capital structure and maximize tax efficiencies (perhaps
including a structure that enables inversion).
In our view, Walgreens management is likely to formalize its intentions with the
publication of the proxy statement recommending the completion of the Walgreens-
Alliance Boots transaction, to be provided between late August and early October. The
proxy statement should outline any changes to the terms of the agreement and the
structure of the combined entity, both of which would need to be amended to achieve
inversion (detailed later in this report). We expect the board to also outline proposals
regarding 1) post transaction management structure; 2) a cost reduction plan, inclusive of a
specific savings target; and 3) new capital structure and allocation targets. Should the
board reach a conclusion on any of these last three items, it is possible that the company
could comment prior to the end of the summer.
If inversion is being considered, we expect the company will want to delay the proxy until
later in this window so as to minimize the time between public announcement and
18 June 2014 6
completion (to reduce political pressures that are likely to be raised by an inversion
announcement). That said, we think the company must provide shareholders with clarity
by early October in order to avoid more aggressive shareholder activism.
Planned vs. Incremental Opportunities
We believe that potential benefits from the Walgreens and Alliance Boots partnership
extend well beyond those identified by the companies when the partnership was
entered into in August of 2012. We first examine the FY16-18 outlook for previously
targeted opportunities (including core operational performance, synergy expansion
opportunities and consolidation of AmerisourceBergen equity ownership) and then turn our
attention to incremental opportunities not anticipated at the time of the transaction,
(including tackling a historically bloated cost structure, adopting a more aggressive capital
composition and re-domiciling the company in a more favorable tax jurisdiction).
In Figure 2 we outline the impact of each of these areas on our earnings estimate. Note that
our published estimate excludes the impact of inversion.

FIGURE 2
Incremental Opportunities Drive Growth, Even Absent Inversion

*The Status Quo includes FY16 synergy benefits but excludes ABC equity income and Almus benefits which may be
included in consensus estimates.
Targeted Opportunities:
1) Core Operations: We model FY16 GAAP operating profit of $8.0bn, inclusive of
$1.040bn in synergies (but excluding the incremental cost savings initiatives outlined
within this report), well below managements initial guidance of $8.5-9.0bn. At the time
of the transaction, Walgreens announced FY16 financial goals which included GAAP
operating profit of $8.5-9.0bn and adjusted operating income (adjusted for LIFO and
amortization expense) of $9.0-9.5bn, inclusive of $1.0bn in synergies. Management has
noted over the last two quarters that financial performance is running below the run rate
required to achieve this guidance but has synergies are running ahead of expectations. If
the status quo is maintained and incremental opportunities are not executed upon, we
estimate that operating profit will total only $7.8bn in FY16. This equates to a status quo
EPS estimate of $4.69 ($4.86 including three quarters worth of contributions from ABC and
Almus synergy benefits), 6% below the current first call consensus of $4.97. We believe
management must adopt strategies which take advantage of the incremental opportunities
outlined below and view the status quo as a conservative base case upon which to layer
incremental benefits.
EPS Components FY13 FY14 FY15 FY16 FY17 FY18
CAGR
13-18
EPS - Status Quo* $2.93 $3.26 $3.94 $4.65 $5.32 $6.06 16%
ABC Equity Income - - - $0.14 $0.32 $0.34
Almus Benefits - - - $0.03 $0.09 $0.17
Cost Reduction (Cumulative) - 0.09 $0.29 $0.34 $0.44 $0.44
Leverage - - - $0.34 $0.55 $0.77
EPS - Barclays Estimate $2.93 $3.35 $4.23 $5.51 $6.71 $7.79 22%
EPS - Barclays w/Inversion $2.93 $3.35 $4.23 $6.50 $7.83 $9.05 25%
Diff. from base case - - 18% 17% 16%
18 June 2014 7
2) Synergy: We project FY16 synergy of $1.040bn on $540mn in generic synergy and
$500mn in non-generic contributions, with generic synergy expanding rapidly in FY17
and FY18 as Almus private label generics are adopted by WAG and ABC. We project that
in aggregate the combination of Walgreens, Alliance Boots and Amerisource should drive a
total of $540 million in sourcing benefits to Walgreens for the 12-months ending August
2016, with $400 million attributable to discounts provided by generic manufacturers, $104
million related to distribution discounts provided to Walgreens by Amerisource (brand
discounts and generic savings relative to the prior Cardinal contract) and $37 million
attributable to Almus brand generics (within this note we publish for the first time a model
for Almus contributions).
We assume little transfer pricing benefit in our model, but foresee a large opportunity for
intercompany sales of private label generics. While we expect that Walgreens will obtain
some benefits from transfer of intangible property and shared services over time, we have
included no transfer pricing benefits in our projections. As the business ramps in FY16, we
project Almus achieves 3% penetration of the $6.8bn WAG/ABC combined generic book of
business (after discounts) resulting in a profit contribution of $44mn and net income of
$37mn. We anticipate that penetration will expand sharply in FY17 and FY18m, reaching
8% in FY18. Applying an 8% penetration rate to WAG/AB U.S. generic expenditures of
$7.9bn, leads to a FY18 profit contribution of $210mn and net income of $175mn. Over the
long-term, we believe Almus can obtain penetration in the low double digits and margins of
35%, 10% above the broader generic industry. Almus benefits are included in our base case
synergy number of $544mn (or $.0.04 in EPS accretion) in FY16. For FY17 and FY18, we
believe Almus will drive $0.09 and $0.17 of incremental EPS, respectively.
FIGURE 3
Walgreens FY16 Generic Sourcing and Distribution Benefit
Source: Barclays Research Estimates

$400
$540
$500
$223
$177
$104
$37
$0
$100
$200
$300
$400
$500
$600
WAG-AB JV
Benefit
ABC Benefit (to
WAG/AB)
Total Sourcing
Benefit
WAG
Distribution
Contract Benefit
Almus Profit
Potential
Total Sourcing &
Distribution
Benefit
WAG/AB Gx
Synergy
Guidance
$, Billions
18 June 2014 8

FIGURE 4
WAG Generic Sourcing Benefit Estimates

Accounting for Equity Income from Ownership in ABC
3) AmerisourceBergen Equity Ownership: Our base case model accounts for the
contribution from equity income related to Walgreens and Alliance Boots ownership of
AmerisourceBergen shares. Our projections for Walgreens ownership and Amerisource
share base, suggest that Walgreens will cross the 20% ownership threshold (at which time
the company will begin consolidating its pro rata share of profits under the income method)
in the March quarter of 2016. We project Walgreens share of Amerisource earnings is
worth $0.14, $0.32, and $0.34 in incremental EPS to FY16-18, respectively, adding 3-6%
growth to the status quo EPS projection.
FIGURE 5
Targeted Opportunity: AmerisourceBergen Income
Incremental Opportunities:
4) Cost Structure: Alliance Boots management could play a key role in driving material
expense reduction at Walgreens, though both corporate and store-based opportunities
are difficult to ascertain. Walgreens year-to-date SG&A growth of less than 1% suggests
the company is already taking actions to reduce corporate expense by an estimated
$250mn (relative to our estimate of normalized SG&A growth of 2-3%). We believe that
focused reductions and additional streamlining provide an incremental opportunity to
reduce corporate expense by $500mn over the three-year period FY15 to FY17. We project
cumulative cost reduction efforts will drive incremental EPS of $0.29 in FY15, $0.34 in FY16 ,
$0.44 in FY17 and FY18. Thus, this incremental opportunity alone represents 7%-8% EPS
accretion over WAGs status quo EPS scenario.
Our base model assumes that Walgreens laps dual promotional investments in FY15 but
does not project benefits from reduced promotional expenditures or increased promotional
Sour cing Benef it s FY15 FY16 FY17 FY18
WAG-AB J V Benefit $139 $223 $260 $281
ABC Benefit (to WAG/AB) $87 $177 $219 $236
WAG Distribution Benefit $102 $104 $106 $108
Almus Net Profit Potential $10 $37 $95 $184
Total Sourcing & Distribution $338 $540 $680 $809
ABC Equity Income Component FY16 FY17 FY18 Note
Incremental benefit to Status Quo scenario (in $mn, except EPS)
EBIT accretion (cumulative) 158 343 363
Tax rate applied 0% 0% 0%
Net income accretion 158 343 363
No. of shares - assumption 1,103 1,085 1,062
EPS accreti on $0.14 $0.32 $0.34
% EPS accreti on over Status Quo case 3% 6% 6%
Assuming WAG and AB fully exercise their ABC warrants, we hit the 20%
threshold for consolidating ABC equity ownership in the March Q of 2016
18 June 2014 9
support from vendors in FY16. We believe these items could boost gross margin by 25-50
BP as we look out to fiscal 2017 and 2018.
Finally, we take a cautious view of store level expense, assuming that low hanging fruit was
removed as part of the Rewire for Growth initiative, savings in the pharmacy are limited
and occupancy costs cannot be reduced. Therefore we project no additional store level
expense reductions through FY18.
FIGURE 6
Incremental Opportunity: Cost Structure
5) Adopting a more aggressive approach to capital structure could enable Walgreens to
apply greater resources to dividend issuance and share repurchase, elevating FY16 -
FY18 shareholder returns. Historically, Walgreens has sought to maintain a strong
investment grade rating (single-A category) in order to ensure low borrowing costs and
favorable terms from creditors, including landlords and trade partners. Over nearly the last
two years, the company has operated with lower ratings, in the mid- to high-BBB range,
without appearing to have experienced material increases in lease costs or possibly access
liquidity, and recent management commentary to equity and debt investors suggests
Walgreens management has made peace with its BBB rating status.
Moving forward, we expect it is likely that Walgreens will formally adopt a long-term target
of a mid-BBB credit rating and adjusts the companys capital structure to take advantage of
the higher leverage levels enabled by such a rating. Discussions with our Barclays High
Grade Credit Research counterpart, Priya Ohri-Gupta, suggest that given Walgreens
historical credit rating and demonstrated success reducing leverage after Phase I was
completed, the company could temporarily increase debt levels to complete a leveraged
recapitalization without endangering its investment grade status as long as it lays out a path
for reducing leverage (via debt reduction or EBITDA growth) over a 12-24 month period.
Specifically, we believe that Walgreens could increase leverage by a full turn at completion
of the merger ($13.6bn), leading the lease adjusted debt to EBITDAR ratio at year end FY15
(August, 2015) to increase from 3.1x (assuming no debt issued at close, 3.5x if $4.9bn is
issued to cover transaction costs under the current structure), to 4.2x while providing rating
agencies with guidance for $5bn of debt reduction and $3bn of EBITDAR growth over the
three years FY16-FY18. This would reduce the debt to EBITDAR ratio to 3.6x by the end of
FY16 and 3.0x by the end of FY18. While such an aggressive move could result in a
negative outlook or even one notch downgrade from the rating agencies, we do not believe
it would endanger Walgreens investment grade status (we place the acceptable steady-
state leverage ratio for maintaining its current ratings of Baa1 at Moodys and BBB at S&P at
approximately 3.25x). We do note that a potential one notch downgrade at S&P could
impair access to the tier 2 commercial paper (CP) market, however WAG had not borrowed
in the CP market for several years prior to the most recent fiscal quarter, when the company
maintained a daily average balance of only $14mn.
SG&A (Cost savings) Component FY16 FY17 FY18 Note
EPS accreti on $0.34 $0.44 $0.44
Assumes $250mn of corporate cost reduction in FY14. Additional $500mn of
corporate and regional cost reduction over the three year period FY15-FY17.
Amount shown is cumulative.
18 June 2014 10
The rationale for engaging in a leveraged recapitalization at closing would in part be to
optimize the capital structure and in part to repurchase shares at a price which does not
fully reflect potential upside from completion of the merger and so might be valued
attractively. Adopting a more aggressive approach to capital structure and deployment
represents a significant incremental opportunity, above and beyond guidance provided by
Walgreens at the time of the transaction. We forecast this scenario to contribute an
additional $0.34 to our FY16 EPS estimate, while we expect ongoing repurchase activity
drives incremental EPS growth of $0.55 and $0.77 in FY17 and FY18 EPS, respectively. Thus,
this incremental opportunity alone represents 7%-13% EPS accretion over WAGs status
quo EPS scenario.
FIGURE 7
Incremental Opportunity: Capital Structure
6) Inversion: We believe the most logical and effective corporate structure for a
combined Walgreens and Alliance Boots would be to invert the existing configuration so
that Alliance Boots becomes Walgreens parent corporation. However, as currently
structured, the Walgreens Alliance Boots transaction will not constitute an inversion,
necessitating that the terms and structure of the transaction are altered prior to completion.
Specifically, the transaction would need to be restructured so that 1) Walgreens becomes
the subsidiary of a foreign parent: Alliance Boots or a new foreign parent (i.e. Alliance
Boots or a newly created foreign entity acquire all Walgreens stock in return for stock in
the new foreign entity or other consideration), and 2) stock and consideration paid are
altered such that Walgreens shareholders receive less than 80% of the foreign parent
entitys shares (i.e.: Alliance Boots shareholders, primarily KKR, must accept stock rather
than cash compensation, and WAG shareholders must accept exchanging their WAG
stock for a combination of stock in the new company and a cash payment). While any
change in structure represents a hurdle, we believe that the substantial benefits unlocked
via inversion provide a strong incentive for all parties to align in order to achieve it.
Should Walgreens and Alliance Boots restructure the terms and structure of the
purchase agreement to enable inversion, we size incremental annual cash tax savings
attributable to an inversion-enabled recapitalization at $797mn. To get to this number,
we assume that Walgreens is able to take advantage of the current deductibility of interest
expense payable on debt held by a foreign parent (inter-company debt) equal to 50% of
FY16 adjusted taxable income of $7,969mn and that the differential in tax rates between
U.S. based Walgreens and Switzerland based Alliance Boots is 20% (if domiciled in the U.K.,
we foresee a differential of 18%). Simply stated, Walgreens U.S. tax rate would stay
Leverage Component FY16 FY17 FY18 Note
Dividends (1,674) (2,019) (2,288)
Share Issuance (repurchase) (14,300) (3,160) (4,080) FY16 repo via increase in leverage, FY17 and FY18 repo via cash flow
Net Debt issuance (reduction) (3,000) (1,000) (1,000)
Total (18,974) (6,179) (7,368)
Incremental interest expense -584 -584 -584 Incremental debt at 4.5%
Net income accretion -368 -368 -368
No. of repurchased shares from leverage 130 0 0 Repurchase attributable to leverage recap
No. of shares - assumption 973 955 932
Lease-adj debt/EBITDA ratio 3.9 x 3.4 x 3.5 x Additional leverage increases ratio from 3.1 to 4.2x at deal closing
EPS accreti on $0.34 $0.55 $0.77
Assumes debt issuance of $13.6bn at time of close. Repayment of $5bn
FY16-FY18
18 June 2014 11
unchanged but its taxable income is reduced for deductible interest payments on inter-
company debt. (above and beyond any potential transfer pricing benefits).
A few notes on the tax rate assumption. 1) The U.S. tax rate for WAG is currently close
to 37% while the underlying Alliance Boots tax rate is roughly 18%, suggesting a delta
of 19%. 2) We believe the benefit from the differential could actually be in excess of
20% given that income paid in the Canton of Zug [where Alliance Boots GMBH is
domiciled] may be exempt from federal level taxation and that further tax rate
reductions may be applicable to holding companies. 3) While the corporate tax rate of
Switzerland is more attractive than that of the U.K., the US-UK income tax treat may
provide advantageous treatment of withholdings on tax dividends. Should the inverted
entity be domiciled in the U.K., we expect the tax rate would be 19%, suggesting a 18%
delta. We view both options as attractive from a tax benefit perspective.
Tax rate impact. We assume that Walgreens will hold all foreign profits offshore, leading
to a roughly 220 bps decline in the consolidated FY16 tax rate, from 37% in FY15 to
34.8% in FY16, prior to inversion benefits. In the inversion scenario, after incorporating
the impact of inter-company debts, we project the tax rate can decline even further to
24.2% in FY16. Our model assumes that Walgreens tax rate will increase FY16 to FY18
as Walgreens profits grow at a faster rate than does foreign profit and the inter-
company tax benefit remains steady. This could prove conservative if Walgreens is able
to execute against transfer pricing opportunities or is able to add additional inter-
company debt over time.

FIGURE 8
FY16 EPS Sensitivity to Inversion Scenario Assumptions Incremental EPS Contribution

The cash tax savings from inversion enabled intercompany debt of $783mn annually,
increases FY16 EPS by $0.99. We assume this tax savings remains constant in FY17 and
FY18 EPS. Given that the share count declines, the impact of this tax savings on EPS
increases to $1.12 in FY17 and $1.27 in FY18. In the inversion scenario, we expect cash
tax savings from intercompany debt opportunity to account for additional 16%-18% EPS
accretion over WAGs status quo EPS scenario.
Tax rate di fferenti al
$782.76 12% 14% 16% 18% 20% 22%
30.0% $0.44 $0.50 $0.55 $0.61 $0.67 $0.72
35.0% $0.50 $0.56 $0.63 $0.69 $0.76 $0.82
40.0% $0.55 $0.63 $0.70 $0.78 $0.85 $0.93
45.0% $0.61 $0.69 $0.78 $0.86 $0.94 $1.03
47.5% $0.64 $0.73 $0.81 $0.90 $0.99 $1.08
50.0% $0.72 $0.82 $0.91 $1.00 $1.10 $1.19
% of WAG EBITDA
subj ect to earni ngs
stri ppi ng
18 June 2014 12
FIGURE 9
Incremental Opportunity: Inversion
Valuation & Price Target
Walgreens shares have performed well over the last year, even as management has
noted that core operations are likely to fall short of FY16 operational targets.
Recognition of the potential for transaction benefits and operational improvements has led
to a 46% increase in WAG shares over the 12-months ending June 16
th
, 2014, as compared
to a 19% increase in the S&P500. Nonetheless, our analysis of the base business, potential
synergies, and incremental opportunities suggests that WAG shares remain undervalued
relative to our earnings growth outlook even excluding potential inversion.

FIGURE 10
FY13-FY18 Earnings CAGR

We are increasing our price target from $56 to $92. Our 12-month price target is arrived
at by applying an earnings multiple of 15x to our FY2018 estimate of $7.79 and then
discounting the result back three years at Walgreens cost of equity of 9%. The 15x multiple
represents a discount to WAGs five-year average of 16x (17x excluding the period of the
Express scripts dispute). Applying this multiple to our 2018 EPS estimate of $7.79, we arrive
at a 2018 price target of $118, which we discount to arrive at our price target of $92, up
26% from current levels. Should the company achieve inversion, we project FY18 EPS will
total $9.05, and foresee upside to $108, up 48% from current levels. The previous price
target of $56 was based on 14.7x our previous adjusted cash FY15 EPS forecast of $3.95
(excluding our $0.14 LIFO estimate add back).
Inversion Scenario FY16 FY17 FY18 Note
WAG-only EBITDA 8,240 8,652 9,084 EBITDA at time of recapitalization
% of EBITDA on earnings stripping 47.5% 48% 48% We assume 47.5%, below the maximum of 50% to allow for existing debt
WAG EBITDA shielded by earnings stripping 3,914 4,109 4,315 Amount of EBITDA that can be shielded
Tax rate - foreign parent 17% 17% 17%
Tax differential from US tax rate 20% 20% 20%
Tax savings 783 783 783
Non-inversion tax expense 2,556 2,648 3,038
% Non-inversion effective tax rate 35% 31% 32%
Post-inversion tax expense 1,774 1,865 2,255
% Post-inversion effective tax rate 24% 22% 24%
EPS accreti on $0.99 $1.12 $1.27
% EPS accreti on over Base Case EPS 18% 17% 16%
Includes benefit of increased share repurchase enabled by 1) additional
EBITDA and 2) cash/stock election (retiring of WAG shares)
Assuming 17% tax rate at the foreign parent level on interest income (from
intercompany debt)
We assume that the capital structure remains constant post FY16. The
company may be able to recap additional equity as EBITDA grows.
EPS FY13 FY14 FY15 FY16 FY17 FY18
CAGR
FY13-18
Status Quo $2.93 $4.65 $5.32 $6.06
Barclays Estimate $2.93 $3.35 $4.23 $5.51 $6.71 $7.79
Barclays Scenario w/ Inversion $2.93 $6.50 $7.83 $9.05
Status Quo 10% 15% 14% 16%
Barclays Estimate 14% 27% 30% 22% 16% 22%
Barclays Scenario w/ Inversion 54% 20% 16% 25%
18 June 2014 13

18 June 2014 14
THE CASE FOR CHANGE
After an extended period of suboptimal operational performance and strategic missteps, we
believe the completion of the Alliance Boots acquisition will position Walgreens to make
material improvements to its U.S. retail pharmacy business. We think the company will be
able to take advantage of numerous new optimization and growth opportunities enabled by
its relationships with Alliance Boots and AmerisourceBergen. However, given the current
management teams track record, we think many shareholders are doubtful that the desired
changes will be made, and pressure is mounting to bring in a new team. A favored option is
to put Alliance Boots management in charge of the joint company.
While we agree with many of the critiques of current management, we have concerns that
regime change could lead to internal disruption, so are hopeful that a middle way can be
found in which Alliance Boots Executive Chairman Stefano Pessina and Walgreens CEO
Greg Wasson work jointly to address the many challenges and opportunities in front of the
company. As such, we have been highly encouraged by the recent statements of
Walgreens management that acknowledge the need to address the companys cost
structure and indicating that they are examining opportunities to optimize capital structure
and maximize tax efficiencies.
We believe the Board and management have begun to internalize investor critiques and are
actively formulating a response that is likely to target opportunities that extend well beyond
those identified when the company entered its partnership with Alliance Boots and
agreement with AmerisourceBergen. This would likely help offset core operational
performance, which is running below the run rate needed to achieve the original FY16
guidance. We expect management will formalize its intentions with the publication of the
proxy proposal related to the completion of the Walgreens-Alliance Boots transaction, to be
provided as early as August and no later than October.
Pathway for Change
Walgreens current Board structure and bylaws provide little protection for current board
members and so deliver a potent incentive to be responsive to shareholder concerns. If
investors conclude that the current Board and management team are unlikely or incapable
of taking the steps necessary to increase shareholder value, they may engage in an effort to
unseat and replace them. Our review of Walgreens bylaws indicates that the company
does not have formidable defenses against such an initiative, though the current Board is
able to take action to create stronger defenses without the consent of shareholders. Key
provisions in the bylaws include:
Board Structure: 1) Directors are elected annually not on a staggered basis, meaning
that the entire board may be replaced in a single year. 2) Members may be removed
with or without cause by a simple majority of shares entitled to vote, meaning
shareholders need not prove cause to remove a director at a special meeting or by
written consent (a high bar which often prevents director removal).
Voting Structure: 1) Voting is cumulative, enabling shareholders to concentrate votes
on specific nominees. 2) As with removal, only a majority of shareholders is required to
elect new directors.
Initiating a Vote: 1) The annual meeting will likely to occur on or around January 8th of
2015, with director nominations due between September 10th and October 10th of
2014. 2) A special meeting can be called at any time by shareholders owning 20% or
more of the voting power. 3) The bylaws also allow for shareholders to act by written
consent.
18 June 2014 15
Walgreens Defense: 1) Walgreens does not currently have a poison pill in place,
however the company does have blank check preferred stock and the board could
easily adopt a poison pill at any time. In addition, the Board has the authority to adopt,
amend or repeal most bylaws without shareholder approval, but changes must consider
fiduciary responsibility.
It appears that Walgreens has not adopted many of the corporate defenses that have
become the norm over the last thirty years. Most significantly, Walgreens bylaws allow for
cumulative voting, which is likely tied to the companys incorporation (and long roots) in
Illinois. Under cumulative voting, each shareholder receives one vote for each seat/office
being voted upon (in the case of WAG, 13 seats), and may aggregate their votes and
concentrate them on a single candidate. This dramatically increases the ability of minority
shareholders to gain representation on the board. The combination of cumulative voting,
election by a simple majority and the annual (rather than staggered) term provides the
Walgreens board far fewer protections than its peers within the S&P 500, suggesting that
members must be responsive to investor sentiment or risk being unseated.
Catalyst for Change
The annual meeting, to be held at or near January 8th of 2015 (one month prior to the
opening of the window for Phase 2 of the Alliance Boots transaction) provides
shareholders with an opportunity to exert significant pressure on the current board and
management team. Specifically, from September 10th to October 10th of 2014,
shareholders may nominate new directors (either a partial or full slate) to be voted on at the
January 2015 meeting. The threat of removal could compel the current board and
management to begin to act on investors priorities in the hope of reaching a compromise
prior to the actual vote.
We believe this effect is already visible, as at the Barclays Retail & Consumer
Discretionary Conference on April 30th, Walgreens management stated the company
was open to evaluating the possibility of inversion and noted a focus on expense
management and willingness to reconsider its capital structure (after completing the
Alliance Boots acquisition). This represented a significant reversal from the March 25th Q2
earnings call on which Greg Wasson stated no intention of inversion or re-domiciling the
company. We view management commentary positively, particularly with respect to
expense management, as it shows a willingness to consider investors views that was
heretofore absent and suggests a compromise may be possible. We expect that
shareholders will provide the current board and management with room to address these
issues over the next several months. We will, however, look for a demonstration of
commitment to structural change, perhaps including renegotiation of the current
Walgreens and Alliance Boots transaction terms and structure to enable inversion before
the proxy nomination window closes on October 10th.
Should investors desire to effect change prior to the annual meeting or without needing
to call a special meeting, written consent enables shareholders to propose to recall
remove and replace board members over a relatively short time period. If a shareholder
chooses to act by written consent, the Board would issue a record date (typically within ten
days of receiving the request), opening a 60-day voting window during which proxy
solicitors working for the initiator/activist and the Board would attempt to garner votes for
their respective proposals.
While the Walgreens shareholder base skews toward relatively conservative
institutions, we do not believe this represents an insurmountable barrier to change.
A review of the most recent proxy shows large holdings of the stock among index funds
and long-only shareholders who in the past have demonstrated relatively limited
appetites for risk (hedge funds are shown to hold just 6%). While this may have
18 June 2014 16
represented a significant barrier just a few years ago, we note that Institutional
Shareholder Services, or ISS (which often influences how index and other such
institutions vote on contested matters), has demonstrated a willingness of late to
embrace activist shareholder proposals. Moreover, our discussions with a large cross
section of institutional investors suggests there is dissatisfaction with current
managements performance and an openness to potential changes, though opinions on
inversion are more divided.
Stefano Pessina is precluded from voting his shares against the recommendation of
the Walgreens board. We would expect Walgreens board to recommend shareholders
vote against any new slate or activist shareholder proposal. It is worth noting that
Stefano Pessinas agreement with WAG, put in place as part of Phase 1 of the
transaction, prohibits him from voting his shares against the recommendation of the
existing Walgreens Board as long as he is a member of either the Walgreens or Alliance
Boots Boards. We believe, however, that he is permitted to resign from the two Boards
in order to implement changes to the other directors, and can include himself in a new
slate. Note that with 7.7% of the total outstanding following Phase 1, and an estimated
17% to 18% pose Phase 2, Mr. Pessina is the only board member with more than 1% of
voting shares.
Next Step
We think it is likely that Walgreens Board and management are currently formulating
proposals for completion of the Walgreens and Alliance Boots combination that may
significantly alter the terms and structure of the transaction. Specifically, the companys
statements at our April conference lead us to believe that Walgreens is considering
adjusting the deal terms to optimize capital structure and maximize tax efficiencies (perhaps
including a structure that enables inversion).
In our view, Walgreens management is likely to formalize its intentions with the
publication of the proxy statement recommending the completion of the Walgreens-
Alliance Boots transaction, to be provided between late August and early October. In
order to complete the second step of the Alliance Boots transaction, Walgreens must obtain
shareholder approval. The purchase agreement requires that Walgreens and Alliance Boots
cooperate in preparing a proxy via which the Walgreens Board will recommend that
shareholders approve the second step of the transaction (or potentially, an alternative
transaction). We expect the proxy will outline any proposed changes to the terms and
structure of Phase 2, perhaps including a more aggressive stance toward leverage and
possibly a proposal for inversion. We expect the proxy may also include or be accompanied
by a revised view of capital allocation priorities and cost structure reduction opportunities.
While the call exercise period for Phase 2 of the Alliance Boots acquisition does not begin
until February 5th, 2015, the purchase agreement allows that the buyer and seller may
agree to alter the exercise period. We expect that should the company target an inversion,
it may seek to complete the transaction in calendar year 2014, in order to avoid any
potential changes to tax regulations that could occur and impact 2015. We are confident,
though, that the material changes to the qualifications for inversion will require legislative
changes that are unlikely to occur before 2016.
Should the Walgreens Board recommend completion of the transaction as it currently
stands, without addressing investor concerns, we think shareholders may engage in an
effort to unseat and replace board members. Given shareholders stated concerns, we are
hopeful that Mr. Pessina and Mr. Wasson can work jointly to address the many challenges
and opportunities in front of Walgreens. However, should we begin to approach early
October without a change in direction, shareholders may propose removal and replacement
of current Board members in advance of the October 10th deadline for the Jan 2015 proxy.
18 June 2014 17
Walgreen Pro Forma FY16 Model
With this report, we are publishing a new Walgreens model which includes 1) updated
standalone projections for Walgreens and Alliance Boots through FY16, 2) updated
projections for Walgreens and Alliance Boots synergies in FY15 and FY16, and 3) a
consolidated view of FY16 FY18, pro forma for the second step of the Alliance Boots
acquisition (as currently structured). After laying out the base case in this section, we go
on to focus on a number of incremental opportunities that we believe could lead to
substantial benefits in FY16 and beyond.
Walgreens has maintained its adjusted operating income target range of $8.5-$9.0 billion
in FY16 while acknowledging that performance to date, most likely at both companies, is
tracking below the CAGR required to achieve this goal. Our pro forma model, which has
been updated to reflect recent performance and cost reduction efforts at Walgreens and
FY14 (end March 31
st
) results for Alliance Boots, projects FY16 operating income of $8.0
billion if we excluded cost reduction initiatives in FY15 and FY16 (which were not
anticipated n managements guidance), well short of Walgreens stated goal. However, we
believe that Walgreens will benefit over the next three years from synergy and accretion
opportunities not originally contemplated in guidance. It is assuming the achievement of a
portion of these supplemental opportunities (built upon a rather conservative base) that
leads to our ratings upgrade.
Walgreens Base Case Model Assumptions
Sales Assumptions
At the front-end, we assume the sales trend improves over time as the company is able
to use its marketing and merchandising funds more efficiently because of the Balance
Rewards program. The company is gathering data about its customers shopping patterns
that will allow it to send targeted promotional offers, though it is unclear whether that is
being done right now. Nonetheless, we expect that further maturation of the program will
yield more effective results that will be beneficial to both traffic and ticket over time. We
forecast front-end comps improve to +1.8% in FY14, +2.5% in FY15, and +3.0% in FY16.
The average annual front-end comp from FY10-FY13 was 3.0%.
At the pharmacy, we expect annual calendar adjusted script growth will remain at the
recent pace of ~4% through FY16. This will be driven by a number of factors, including an
aging population and increased access to pharmacy coverage through public exchanges
and expansion of Medicaid. Sales will be further boosted by inflation in branded drugs,
which has averaged low to mid single-digits in recent months. This will be partially offset
by the impact of new generic introductions which will accelerate as WAG exits FY14, but
will moderate again in FY17 and drop off further in FY18 and FY19.
Gross Margin Assumptions
In looking at the next 2 1/2 years, we took three main factors into account when
modelling Walgreens gross margin trends: new generic introductions, a cycling of double
promotional investments in the front end, and the more fundamental ability to lower
spending on promotions gradually as the company makes more targeted offers using data
from the Balance Rewards program. We also assume vendors provide more promotional
support as Walgreens gives them better customer data.
Generics. To estimate the benefit from new generics for the remainder of fiscal 2014,
we looked at the drugs that are entering the market this year and whether they will be
single sourced or multi-sourced from the beginning, and then compared them to last
years new introductions. We did the same analysis for fiscal 2015 and fiscal 2016,
though the data becomes less reliable later in time, since introductions can be delayed
and/or the number of competitors can vary.
18 June 2014 18
Cycling Investment. Our forecast assumes that WAG cycles dual investments in
promotions in the fourth quarter of fiscal 2014 but continues the elevated investment
level at the same pace through fiscal 2015. In fiscal 2016 we expect the company to
rely somewhat more on targeted promotions using data from its rewards card.
Targeted Promotion Benefit. Looking out beyond FY16, the rewards program should
allow Walgreens to start shifting more of its promotional spending to its most loyal
customers. Walgreens program is different than the ones used by CVS and Kroger
(points are earned only on certain purchases), but we believe the data it accumulates
will still be useful for its own marketing purposes and to vendors, who may give it more
promotional support as the quality of the data it shares gets better. The company may
get some guidance in this process from Boots, but we believe that more targeted
merchandising could be accomplished on its own, once it has enough data about
customers to draw conclusions about their spending. Every retailer must find the
appropriate balance between targeted and broad-based promotions, so it may take a
number of years before Walgreens gets the optimal benefit from the program.
Selling, General, and Administrative Expenses Assumptions
Historically, SG&A dollar growth at Walgreens has been both high and variable, and the
company has rarely explained the results adequately, if at all. Expense growth did
moderate once Walgreens started to slow square footage growth in fiscal 2010, but the
correlation was far from perfect and the dispute with Express Scripts came right as the
benefits of the square footage reduction should have been experienced, masking the
benefit. Only in 2011 did WAG manage to get gross profit dollars growing more quickly
than SG&A. With the Express Scripts dispute in 2012, SG&A dollar growth slowed as the
company worked hard to reduce operating costs to offset the impact of declines in script
volume and market share, but these actions were not enough to keep EPS from declining.
In FY13, SG&A dollar growth re-accelerated somewhat as volume began to return to the
stores, yet the pace of growth remained lower than it had been over the previous five years,
in part because new store growth had slowed. FY13 benefited from the peak profit period
for many new, single-source generics, so revenue growth was very modest while gross
profit dollars grew faster than SG&A dollars.
Estimating a run rate for expenses growth should be relatively straight forward as wages
benefits, insurance, and credit card fees all rise steadily unless mitigating efforts are
made. Our base case models normalizes SG&A growth at 2.5%-3.0%, reflecting the growth
rate in operating costs experienced by most retailers, including CVS. Given all the variability
in growth at Walgreens expenses over the past few years, this is no more than a reasonable
guess. We note that SG&A growth has been running at a lower pace year to date in fiscal
2014 (~1.0%), and we have some information suggesting that the company is currently
cutting corporate overhead. However, Walgreens has provided neither details about what
expenses have been eliminated so far this year nor what its plans are for the future, hence
we use a normal growth rate for the period of fiscal 2015 fiscal 2018.
Other Walgreens Transaction Considerations
We expect incremental LIFO and transaction amortization of ~$500mn.
Alliance Boots Assumptions
Our projections for Alliance Boots are based its recently reported fiscal 2014 results for
the period ended 3/31/14 (reported on May 15, 2014).
Revenue Projections. We project total FY16 revenue of ~43 billion, which assumes 3%
growth in the wholesale business, no growth in the Boots pharmacy business, and
modest growth in the retail, optical and other segment (which is very small); we also
include the recent Farmacias Ahumada transaction. The company operates in mature
18 June 2014 19
markets with significant control of wholesale and retail pricing and margins by UK and
European governments. Growth in the wholesale operations has generally come from
acquisitions, which has been a focus for Alliance Boots management, though we do not
forecast any additional acquisitions going forward.
Margin Expectations. We expect margins will be relatively static despite ongoing
reimbursement reductions as the company has proven itself to be nimble at offsetting
reimbursement pressure by operating the business more efficiently. Given our relatively
limited visibility into Alliance Boots accounting and markets we have adopted what we
believe to be a realistically conservative model.
Synergy Expectations
Walgreens purchased 45% of U.K. based retail pharmacy operator and wholesale drug
distributor Alliance Boots on August 2, 2012, and formed the Walgreens Boots Alliance
Development GmbH (WBAD) joint venture global sourcing entity in Bern, Switzerland, on
October 30, 2012. On March 19, 2013, Walgreens and Amerisource announced a 10-year
distribution agreement as part of which Amerisource would take on both Walgreens brand
distribution (previously served by Cardinal) and generic distribution (previously sourced from
manufacturers by Walgreens and distributed via the Walgreens retail distribution network)
while moving to purchase all generic products via the WBAD global sourcing entity.
With the original Alliance Boots relationship of June 2012, Walgreens stated an
expectation for $1 billion in synergies, of which 90% of the total (or $900 million) would
be attributable to procurement, and 50% of the total (or $500 million) would be
attributable specifically to generic procurement. Walgreens reported $154 million in total
synergy benefits for its fiscal 2013, the first year of the relationship, and has provided
guidance for $350-$450 million of synergies in its fiscal 2014. It has provided no
commentary on the respective sources of synergies reported to date but has stated that
both generic and non-generic procurement synergies are building and has repeatedly
reiterated the total synergy goal of $1 billion.
Alliance Boots stated that its fiscal 2014 synergies, for the 12-months ending March 31,
2014 were ahead of target though it is unclear whether that refers to timing or the
dollar amount. Alliance reported that its share of post-tax earnings of the Walgreens
Boots Alliance Development JV (WBAD) totalled 58 million, or $98 million, in fiscal
2014.
Generic Procurement Synergies
With respect to generic synergies, it is our opinion that Walgreens initial plans (and
guidance) for Alliance Boots were extremely ambitious, as they included both large
international generic sourcing benefits and significant gains from moving to self
distribution, both of which involve a high degree of execution risk. Specifically, our
projections suggest that the sourcing benefits available to Walgreens and Alliance Boots
absent the agreement with AmerisourceBergen were well below $500 million. Rather, we
believe that the synergies outlined at the time of the WAG-AB partnership were dependent
on working with a large, U.S. based distributor such as AmerisourceBergen, which when
combined with Walgreens led to significant generic procurement scale in the U.S. The
importance of the Amerisource volume should not be understated as the U.S. remains the
largest and most profitable generic market in the world, and generic discount tiers (that
relate discounts to volume levels) are well established here. It is our opinion that the
combination of Walgreens and Amerisources domestic volume has played a key role in
driving the WBAD JVs success to date. We also note that Amerisource took on Walgreens
brand and generic distribution, providing what we believe to be a considerable savings
relative to the prior contract with Cardinal Health.
18 June 2014 20
Walgreens-Alliance Boots Generic Sourcing. The generic purchasing market model
developed by Barclays Healthcare Distribution and Technology team (outlined in greater
detail in the initiation report dated May 4th, 2014) projects global sourcing benefits
accruing from the WBAD Generic Sourcing Joint Venture formed by Walgreens and
Alliance Boots (prior to inclusion of Amerisource) at $223 million in fiscal 2016, well
below guidance for $500 million in total generic sourcing benefits. (Note that our $223
million estimate for fiscal 2016 is in line with our previously published estimate of $250
million for calendar year2016.)
Walgreens-AmerisourceBergen Generic Sourcing. However, we project that the
addition of Amerisources U.S. volume to the WBAD purchasing entity greatly increased
negotiating leverage with generic manufacturers, enabling Walgreens to garner an
additional $177 million in sourcing benefits, aside from gains accruing to
AmerisourceBergen.
Walgreens-AmerisourceBergen Distribution Contract. Beyond sourcing benefits, we
believe that Walgreens benefits from its ten-year distribution agreement with
Amerisource, which was likely provided at below market rates in return for participation
in the WBAD joint venture. We project the discounts and GPO fees generated by this
contract will lower Walgreens distribution/sourcing cost by an additional $104 million
in FY16. We attribute these savings both to reduced brand distribution expense and
lower secondary generic support relative to the legacy contract with Cardinal. (Note
that Walgreens included self-distribution savings in the original Alliance Boots generic
sourcing synergy target of $500 million we view this as misplaced given long
established systemic reasons for retailers to employ distributors and that any such
benefits would be domestic, and so do not fit with the suggested global nature of the
$500mn synergy target).
Almus Generics Opportunity. The Walgreens and Amerisource relationships provide a
valuable channel for Alliance Boots Almus Pharmaceuticals generic brand (detailed in
the following section) to enter the U.S. market. We estimate Almus contributes $37mn
in after-tax income in FY16 based on 2% penetration of the $6.8 billion WAG/ABC
combined generic book of business (after discounts).
We project that in aggregate the combination of Walgreens, Alliance Boots and
Amerisource should drive a total of $540 million in sourcing benefits to Walgreens
for the 12-months ending August 2016, with $400 million attributable to discounts
provided by generic manufacturers, $104 million related to distribution discounts
provided by Amerisource (brand discounts and generic savings relative to the prior
Cardinal contract) and $37 million attributable to Almus brand generics.
18 June 2014 21
FIGURE 11
Walgreens FY16 Generic Sourcing and Distribution Benefit
Source: Barclays Research Estimates

FIGURE 12
Sourcing Benefits Increase Over Time: With Almus as the Key Driver

Transfer Pricing Considered: The Almus Opportunity
(For a detailed discussion of transfer pricing, see the Appendix, page 44)
We assume no transfer pricing benefits in our model, but foresee a large opportunity for
intercompany sales of Almus private label generics. Walgreens owns numerous
trademarks and trade names and holds more than 75 patents but does not engage in
material research and development activities. Consequently, we expect that the companys
ability to transfer IP to favourable tax domains will be limited as compared to those enjoyed
by pharmaceutical manufacturers. While we expect that Walgreens will obtain some
benefits from transfer of intangible property (IP, of which intellectual property is a sub-
category) and shared services over time, we have included no transfer pricing benefits in
our projections. Rather, we believe the most material inter-company opportunity will come
from simply driving penetration of Alliance Boots existing private label generic, OTC and
beauty brands in Walgreens (and AmerisourceBergens) U.S. markets via intercompany
transactions.
For the purposes of our model, we focus on the Almus private label, which represents an
opportunity for increasing the overall profitability of the generic business. The Walgreens
$400
$540
$500
$223
$177
$104
$37
$0
$100
$200
$300
$400
$500
$600
WAG-AB JV
Benefit
ABC Benefit (to
WAG/AB)
Total Sourcing
Benefit
WAG
Distribution
Contract Benefit
Almus Profit
Potential
Total Sourcing &
Distribution
Benefit
WAG/AB Gx
Synergy
Guidance
$, Billions
Sour cing Benef it s FY15 FY16 FY17 FY18
WAG-AB J V Benefit $139 $223 $260 $281
ABC Benefit (to WAG/AB) $87 $177 $219 $236
WAG Distribution Benefit $102 $104 $106 $108
Almus Net Profit Potential $10 $37 $95 $184
Total Sourcing & Distribution $338 $540 $680 $809
18 June 2014 22
and Amerisource relationships provide Alliance Boots Almus Pharmaceuticals generic
brand with a valuable channel for entering the U.S. market (Almus obtains the IP, such as
formulation and clinical data used to support the ANDA necessary to manufacturer a
generic product and then engages a contract manufacturer to produce the product,
capturing a portion of traditional generic profits). Our model assumes that Almus must
acquire new IP and contract with new plants to enter the U.S. market (i.e.: the company
cannot simply repurpose product produced for the European market) and so profits and
market penetration ramp over a multiyear period.
As outlined in our synergy numbers, we expect Almus will be one of the primary drivers
of post FY16 generic benefits. We view FY14 and FY15 as investment years, during which
Walgreens and Alliance Boots will obtain IP, set up the manufacturing contracts and
establish intercompany transfer pricing via the WBAD joint venture.
We project that the incremental margin from private label manufacturing can exceed
that of the broader generic industry (of roughly 25%), as the private label manufacturer
is able to target its product mix based on captive end market demand and as the
manufacturer incurs no sales and marketing expense.
Margins should ramp as the business gains scale in FY16. We project Almus achieves
2% penetration of the $6.8bn WAG/ABC combined generic book of business (after
discounts) in FY16 resulting in a profit contribution of $44mn and net income of
$37mn.
We project penetration expands to 8% in FY18 while WAG/AB U.S. generic expenditures
expand to $7.9bn, driving a FY18 contribution of $222mn in profit or $184mn in net
income. Over the long-term, we expect Almus can obtain penetration in the low double
digits and margins of 35%, 10% above the broader generic industry.
We assume that Almus will taxed at the companys foreign tax rate of 17%, though we
believe it is possible that Alliance Boots will hold the majority of IP in Switzerland, where
it may be subject to a substantially lower tax rate. Alternatively, Alliance Boots could
develop new IP in the U.K. under new Patent Box regulations which holds tax on U.K.
derived patents to 10%.
FIGURE 13
Private Label Generics Represent the Most Significant Intercompany Opportunity


Almus Benef it s FY15 FY16 FY17 FY18
US Gx Expenditure at Cost (WAG &
ABC)
6,318 6,807 7,352 7,938
Penetration Rate 1% 2% 5% 8%
Almus U.S. Sales $78 $168 $364 $635
Almus Margin 15% 26% 31% 35%
Almus Gr oss Pr of it f r om US sales $12 $44 $114 $222
Foreign Tax Rate* 17% 17% 17% 17%
Almus Net Income f r om US sales $10 $37 $95 $184
18 June 2014 23

FIGURE 14
We Project Almus Reaches 8% Penetration and 35% Margins in FY18

Non Generic Synergy
Walgreens has indicated that about 50% of the $1 billion of synergies it plans to
generate from the acquisition of Alliance Boots will come from areas outside of
pharmaceutical procurement. About $400 million is to come from procurement of not-
for-resale items such as shopping bags and pill containers, commodity items such as cotton
balls and combs, private label merchandise such as OTC medications and childrens care
products, and seasonal merchandise; some synergies may be generated in services as well.
Obviously there are differences in the products sold in the US and the UK, but we think there
is likely to be enough potential among all these opportunities to hit the $400 million goal.
As a reminder, in FY13 WAG alone spent an estimated $17.1 billion on the cost of front-end
merchandise (assuming ~35% of sales comes from the front end and the average gross
margin is 32%).
The final $100 million of synergies is the anticipated profit from selling Boots private
label products, such as No. 7 and Botanics, in Walgreens U.S. stores. Assuming that
these are incremental sales, and using a gross margin of 40% (though it may be higher),
this means Walgreens would need to generate an incremental $250 million of revenues,
which represents only about a 1% increase in estimated front-end sales. Generating this
level of sales should be achievable, as it is a relatively low bar (could probably occur if only a
sub-set of customers bought one or two products each year).
We are sceptical, however, that WAG can duplicate a Boots beauty department that sells
primarily private brands in the U.S. We note that relative to the U.K., the U.S. is a large
market, and the cost of developing brand recognition is very high, and the process can take
a long time. Most beauty brands in the US have been around for decades, and we have
frequently seen new ones fail after large marketing expenditures have been made, even
when they are introduced by established manufacturers. In addition, sales of prestige
beauty products are well-developed at U.S. department stores, with some sold at dedicated
beauty stores such as Sephora, while masstige beauty products are sold at Sephora and
Ulta. The U.K. beauty business is not segmented in this way, nor is there the same broad-
based competition from dedicated beauty stores such as Ulta and Sephora.

Consolidating ABC Stock Ownership
Our published estimates include the contribution from equity income related to
Walgreens and Alliance Boots ownership of AmerisourceBergen shares. Our projections
for Walgreens ownership and Amerisource share base, suggest that Walgreens will cross
the 20% ownership threshold in March of 2016 (at which time the company will begin
consolidating its pro rata share of profits under the income method). Our published
estimates include this benefit.
Al mus profi t margi n
184
5% 10% 15% 20% 25% 30% 35%
0% $0 $0 $0 $0 $0 $0 $0
2% $7 $13 $20 $26 $33 $40 $46
4% $13 $26 $40 $53 $66 $79 $92
6% $20 $40 $59 $79 $99 $119 $138
8% $26 $53 $79 $105 $132 $158 $184
10% $33 $66 $99 $132 $165 $198 $231
12% $40 $79 $119 $158 $198 $237 $277
14% $46 $92 $138 $184 $231 $277 $323
% Al mus Penetrati on
of WAG & ABC Gx
Expendi tures
18 June 2014 24
Key assumptions:
WAB Holdings (jointly owned by WAG and AB) will gradually increase its stake in ABC
from 10.4mn shares at the end of February 2014 (as reported on the balance sheet of
WAG) to 19.9mn shares in March 2016 (the maximum allowed for open market
purchase from the Framework Agreement dated March 2013).
ABC will continue its share repurchase program beyond cancelling out the dilutive effect
of warrants given to WAG and AB. Our model assumes ABCs average diluted shares
outstanding decline from 234.3mn shares at the end of March 2014 to 231.1mn in FY14
(ABC FY ending in September), 221.5mn in FY15, and 211.3mn at the end of FY16.
For simplicity, we assume WAG and AB will each exercise in full their warrants to
purchase 11.35mn shares of ABC by March 31, 2016 (exercisable at a price of $51.50,
during the 6-month period beginning March 1, 2016). We assume WAG and AB will
each exercise in full their warrants to purchase 11.35mn shares of ABC by March 31,
2017 (exercisable at a price of $52.5, during the 6-month period beginning March 1,
2017).

FIGURE 15
Forecasted equity ownership in ABC by WAG and AB (FY of ABC)

Source: Barclays Capital
Figure 15 shows our forecasted equity ownership of ABC by WAG and AB. Based on the
assumptions above, total equity ownership will hit 20% in March of 2016, at which point
WAG will recognize ABC equity income on its income statement. (For the time preceding
this, during which WAG and AB will hold less than a 20% ownership of ABC, the companies
carry their ABC stakes on the balance sheet at market value.) We project Walgreens pro-
rata share of Amerisource earnings is worth $0.14 in FY16, $0.32 in FY17 and $0.34 in
FY18 (included in our published estimates).
5% 5% 5% 5%
11% 11%
5% 5% 5% 5%
11% 11%
9% 9%
10%
9%
9% 9%
4%
5%
6% 6%
6%
7%
7%
8%
8%
9%
20%
20% 21%
20%
31% 31%
0%
5%
10%
15%
20%
25%
30%
35%
E
q
u
i
t
y
o
w
n
e
r
s
h
i
p
i
n
A
B
C
WAGviaWalgreensPharmacyStrategies,LLC
ABviaAllianceBootsLuxembourgS..r.l.,
WABHoldings
TotalWAGandAB
18 June 2014 25
FIGURE 16
Targeted Opportunity: AmerisourceBergen Income

ABC Equity Income Component FY16 FY17 FY18 Note
EPS accreti on $0.14 $0.32 $0.34
Assuming WAG and AB fully exercise their ABC warrants, we hit the 20%
threshold for consolidating ABC equity ownership in the March Q of 2016
18 June 2014 26
POTENTIAL SOURCES OF INCREMENTAL BENEFIT
We believe that the potential benefits from the Walgreens and Alliance Boots partnership
extend well beyond those identified by Walgreens when the partnership was entered into
in August of 2012 and FY16 financial goals were provided. These incremental benefits
include 1) a partner and management team from Alliance Boots whose historic experience
in difficult markets positions them well to enable (or drive) Walgreens to address its historic
weakness relative to cost structure, 2) a chance to adopt a more aggressive capital
structure (if perhaps temporarily), 3) an opening to move to re-domicile the company in a
more favourable tax jurisdiction.
1. Addressing a Bloated Cost Structure
Corporate & Regional Overhead
We have been saying for years that WAGs cost structure is too high and needs to be
reduced. Although the company has never disclosed the amount it is spending on
corporate and regional overhead, the chart below shows the steady rise in SG&A over an
extended time frame. Comparing SG&A growth to gross profit dollar growth, we find a
multi-year gap in the two metrics. As we indicated earlier in the report, the exceptions to
this trend were 1) when the company decided to slow square footage growth, which was
implemented in fiscal 2010 but first showed up in a slowing of SG&A dollar growth in fiscal
2011; and 2) when the peak of the generic wave boosted the gross margin in 2012 and
2013. Unfortunately, the dispute with Express Scripts pressured both sales and gross profit
dollar growth in fiscal 2012, more than offsetting the benefit of both the slowdown in
square footage growth and the generic wave. Walgreens did make adjustments to
expenses in fiscal 2012 in an effort to offset the impact of lower script volumes and front-
end traffic, but expenses still grew faster than gross profit dollars.
FIGURE 17
WAG Difference in YoY Growth Rates: Gross Profit vs. SG&A
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Gross Profit 15.9% 15.6% 11.7% 15.8% 9.1% 5.9% 7.7% 8.0% -0.7% 3.8%
SG&A Expense 16.1% 15.7% 13.3% 14.3% 9.1% 8.9% 8.0% 6.7% 1.6% 3.5%
Difference -0.2% -0.1% -1.6% 1.4% 0.0% -3.0% -0.3% 1.3% -2.3% 0.3%

Source: Company reports and Barclays Research
SG&A growth has been running at a slower pace year to date in fiscal 2014 (~1.0%)
than what would be normal for other retailers and is well below the average for
Walgreens over time. We have some information suggesting that the company is
currently cutting corporate overhead, though the company has only barely
acknowledged this despite local Chicago media reports. Assuming that SG&A growth
remains on its year to date trend for all of fiscal 2014, we estimate the company will
have cut expenses by about $250 million by year end.
We project that the company could cut another $500 million over the three year
period, FY15-17. However we have little information about what has already been cut
or what is left to be reduced, either at the corporate office or within the local/regional
field organizations. Alliance Boots is thought to run a much leaner operation and
would be able to guide WAG in this process, so we believe these cuts are possible. In
fact, investors have expressed a desire for more specificity about what additional
efficiencies can realistically be achieved.
18 June 2014 27
If Walgreens can cut $750 million over the four year period FY14-2017, then at the
end of that period we believe the company will have achieved a reasonable cost
structure and instituted strong expense controls. From that point on, we expect SG&A
dollar growth will normalize at 2.5%-3.0%.
Store Level Operational Improvement
As a large, well-established drug retailer that grew across the U.S. very successfully for
many years, we believe Walgreens operations are fundamentally sound. In the past 5-7
years, the company has addressed important issues, including reducing the SKU count and
making the stores easier to shop by lowering shelf heights and cleaning up aisle displays.
For years the company did no consumer research, and it waited too long, in our opinion, to
introduce a rewards program. Both are in place now, however, and will contribute to front-
end improvement over time.
Based on our current understanding of the business, the biggest opportunity to improve
WAGs results in the short run is to optimize marketing and merchandising expenditures.
This spending has been unusually high for the past year as the company has been forced to
maintain its broad-based ad circular program while also developing its new rewards
program, which was introduced in September, 2012.
The company will be cycling the dual set of investments this spring, and may even be
able to moderate the broad-based promotions in the following months, as customers
recognize the ease of getting promotional deals directly on the Balance Rewards card.
Right now Walgreens does not appear to be using data from specific customers to tailor
the offers they get, but over time WAG should be able to target its marketing monies
towards its best customers, thereby getting a higher yield on that spending. It will
also give WAG a much better understanding of what its customers are buying, allowing
it to adjust and localize its in-store offering and promotional events. Access to better
data would also be valued by large suppliers, so promotional support could increase
over time.
In our view, WAG would have been able to realize most of the benefits of the rewards
program without buying Boots, but given that companys experience with loyalty
marketing, the merger may allow it to move faster or be more efficient in its effort.
Customer behaviour will naturally be different in the US and the UK, so we think what
Boots can share relates to process rather than to specific actions.
Figuring out how to lower store costs is much tougher, though some observers have
said that CVS runs a more efficient front-end operation. Several years ago, WAG
implemented a cost-cutting initiative it called Rewire for Growth. The steps taken
included eliminating district support personnel in areas like beauty, as well as reducing
the number of SKUs, A streamlined merchandise offering should have brought down
store labor costs related to the handling of inventory. It is not clear, though, if WAG got
the outcomes it was hoping for or if there is still more potential to improve efficiency.
That is an area where Boots might be able to be helpful, though again the US and the UK
markets are very different.
Making the pharmacy more efficient would probably be difficult. WAG operates high-
volume pharmacies, and some sources say they work their pharmacy staff very hard. Other
sources have said that labor could be used more efficiently, but given the volumes being
handled and WAGs historical investments in technology, it is hard to imagine that the
incremental opportunity in the pharmacy comes close to that in the front end.
A barrier to store-level cost reduction is lease costs. As shown in the table below the rent
per square foot that WAG pays on its stores has been rising steadily since fiscal 2005, and
compared to CVS, it is now paying substantially more per square foot, even though it owns
18 June 2014 28
more of its stores. Drug store leases tend to be long (20+ years), and WAG has attractive
locations, so lowering this cost would be difficult and perhaps unwelcome.
FIGURE 18
Rent Comparison: Walgreen vs. CVS Caremark
In sum, we believe that Alliance Boots management can play a key role in driving
material expense reduction, though both corporate and store-based opportunities are
uncertain. We believe that Walgreens may have already taken actions in FY14 to reduce
corporate expense by $250mn. Our model assumes that Walgreens laps dual
promotional investments in FY15 but does not project benefits from reduced promotions
expenditure or increased promotional support in FY16. We expect these items could add
25-50 BP of gross margin benefit as we look out to fiscal 2017 and 2018. Finally, we
take a cautious view of store level expense, assuming that low hanging fruit was
removed as part of the Rewire for Growth initiative, savings in the pharmacy are limited
and leased costs cannot be reduced. Therefore, we project no additional store level
expense reductions through FY18.
Walgreen FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
AnnualRent($inmillions) 1,010 $ 1,161 $ 1,307 $ 1,432 $ 1,619 $ 1,787 $ 1,975 $ 2,218 $ 2,500 $ 2,571 $ 2,628 $
RetailSellingSq.Ft.(millions) 46 51 55 60 65 71 79 84 86 87 89
PercentofRetailStoresOwned 17.0% 18.0% 18.0% 18.0% 19.1% 19.0% 21.0% 20.0% 21.0% 20.0% 20.0%
PercentofRetailStoresLeased 83.0% 82.0% 82.0% 82.0% 80.9% 81.0% 79.0% 80.0% 79.0% 80.0% 80.0%
LeasedRetailSellingSq.Ft.(millions) 39 41 45 49 53 58 62 67 68 70 72
RentPerAverageSquareFoot 29.0 $ 30.2 $ 30.3 $ 31.7 $ 32.3 $ 32.9 $ 34.3 $ 37.1 $ 37.4 $ 37.1 $
%Change 4.2% 0.3% 4.4% 1.9% 1.9% 4.4% 8.2% 0.6% 0.6%
CVSCaremark FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
AnnualRent($inmillions) 890 $ 1,068 $ 1,258 $ 1,396 $ 1,601 $ 1,724 $ 1,899 $ 2,035 $ 2,117 $ 2,193 $ 2,230 $
RetailSellingSq.Ft.(millions) 33 44 45 59 57 66 68 70 72 73 75
PercentofRetailStoresOwned 4.0% 3.0% 3.0% 6.0% 3.6% 5.2% 4.2% 5.0% 6.0% 5.0% 5.9%
PercentofRetailStoresLeased 96.0% 97.0% 97.0% 94.0% 96.4% 94.8% 95.8% 95.0% 94.0% 95.0% 94.1%
LeasedRetailSellingSq.Ft.(millions) 31 42 43 55 54 63 65 66 67 69 71
RentPerAverageSquareFoot 29.1 $ 29.4 $ 28.3 $ 29.2 $ 29.4 $ 29.7 $ 31.0 $ 31.7 $ 32.1 $ 31.9 $
%Change 1.0% 3.6% 3.1% 0.6% 1.1% 4.4% 2.3% 1.1% 0.8%
Note:AsofDec.31,2013,owned~5.9%ofitsretailstores.Morethanonethirdofstoreswereopenedorsignificantlyremodeledwithinthelastfiveyears.
Note:AsofAug.31,2013,owned~20%ofitsretailstores.Notincludingtheapproximately5,000locationsthatwereconvertedundertheCustomerCentric
RetailinginitiativeconcludedinFY12,~24%ofstoreshavebeenopenedorremodeledduringthepastfiveyears.
18 June 2014 29
FIGURE 19
Incremental Opportunity: Cost Structure

SG&A (Cost savings) Component FY16 FY17 FY18 Note
EPS accreti on $0.34 $0.44 $0.44
Assumes $250mn of corporate cost reduction in FY14. Additional $500mn of
corporate and regional cost reduction over the three year period FY15-FY17.
Amount shown is cumulative.
18 June 2014 30
2. Leveraging the Balance Sheet.
Note: In order to adequately reflect Walgreens and Alliance Boots lease obligations, our
leverage analysis is based on lease-adjusted gross debt/EBITDAR. EBITDAR is derived from
EBITDA plus rent expense, while lease-adjusted debt is calculated by adding lease obligation
(assuming 8x rent expense) to total debt.
Adopting a more aggressive approach to capital structure could enable Walgreens to
apply greater resources to dividend issuance and share repurchase, elevating FY16 -
FY18 shareholder returns. Historically, Walgreens has sought to maintain strong
investment grade ratings (in the single-A category) in order to ensure low borrowing costs
and favourable terms from creditors, including landlords and trade partners. The company
maintained a lease-adjusted debt to EBITDAR ratio of 2.5x-2.6x from 2001 to 2008
(supporting an A+ credit rating at S&P) and hovered around 3.0x from 2009 to 2011
(allowing it to hold an A2 rating at Moodys despite a one notch reduction to A at S&P
driven by the Duane Reade acquisition in 2010). Debt-to- EBITDAR increased from 3.0x at
the end of FY11 to 3.6x at the end of FY12 owing both to a 6.6% decline in EBITDA related
to the Express Scripts dispute and an increase in debt from $2.4 billion to $5.4 billion, to
fund Phase 2 of the Alliance Boots transaction. With increased leverage, Walgreens
absorbed a reduction in its credit rating, to Baa1 at Moodys (from A3) and BBB at S&P
(from A).
FIGURE 20
WAG - S&P Rating History

FIGURE 21
WAG - Moodys Rating History
Effective Rating Watch
Aug12 BBB
Jun12 A
May10 A
Feb10 A+
Oct08 A+
Sep08 A+
Jun86 A+
Dec80 A
Jul80 BBB+

Source: S&P Source: Moodys
It is our opinion that Walgreens shareholders would be well served by maintaining and
perhaps increasing debt levels with or after Phase 2 of the transaction. Over the past two
years or so, during which the company has operated with a BBB credit rating, it has not
appeared to have any difficulties accessing price discounts and attractive payment terms
from vendors or when negotiating lease rates on new stores. The company may have
found it harder to access the commercial paper market in size, but it has largely not needed
to tap this market to support liquidity (WAG had not borrowed in the CP market for several
years prior to the most recent fiscal quarter, when the company maintained a daily average
balance of only $14mn). Given this experience and recent commentary suggesting
Walgreens management has made peace with its BBB rating status, we believe the company
could adopt a more aggressive long-term approach to capital structure with minimal cost or
disruption - though we believe it is important for Walgreens to maintain its investment
grade rating. In our view, it would be unprecedented for a company of Walgreens size to
willingly take moves that would result in a credit rating below investment grade.
Date Rating Action
Mar14 Baa1 RATINGAFFIRMATION
Aug12 Baa1 Downgrade
Jun12 A3 OnWatchPossi bl eDowngrade
Apr12 A3 Downgrade
Jan12 A2 OnWatchPossi bl eDowngrade
Oct08 A2 Downgrade
Sep08 A1 OnWatchPossi bl eDowngrade
Jul 08 A1 New
Dec92 WR Wi thdrawn
Jul 92 Aa3 Upgrade
Jul 87 A1 Upgrade
Jun86 A2 New
18 June 2014 31
We expect it is likely that Walgreens adopts a long-term target of mid-BBB credit ratings
and adjusts the companys capital structure to take advantage of the higher leverage
levels enabled by such a rating. Discussions with our Credit Research counterpart suggest
that given Walgreens historic credit rating and demonstrated success reducing leverage
after Phase I was completed, the company could temporarily increase debt levels to
complete a leveraged recapitalization without endangering its investment grade rating as
long as it lays out a path for reducing leverage (via debt reduction or EBITDA growth) over a
12-24 month period. Specifically, we believe that with completion of the merger Walgreens
could increase the rent adjusted debt to EBITDAR ratio from 3.1x (3.5x if $5.0bn is issued to
cover transaction costs under the current, non-inverted, structure) by a full turn to 4.2x,
while providing the rating agencies with guidance for $5bn in debt reduction and $3bn in
EBITDAR growth over the three years FY16-FY18.
While such an aggressive move could result in a negative outlook or even one notch
downgrade from the rating agencies, we do not believe it would endanger Walgreens
investment grade status (we place the acceptable steady-state leverage ratio for
maintaining its current ratings of Baa1 at Moodys and BBB at S&P at approximately 3.25x).
The rationale for engaging in a leveraged recapitalization at closing would in part be to
optimize the capital structure and in part to repurchase shares at a price which does not
fully reflect potential upside from completion of the merger and so would be valued
attractively.
Pro Forma Model. Assuming no additional leverage, we project Walgreens would end
FY15 with $14.2 billion in total debt and $40.6 billion in lease-adjusted total debt,
resulting in a lease-adjusted total debt/EBITDAR ratio of 3.1x.
Lever to Fund Transaction. When Step 1 was completed, Walgreens informed the
credit markets that the company would fund Step 2 with roughly $5.0bn of additional
debt issuance. If Walgreens was to issue $5.0bn of debt at close, we project FY15 lease-
adjusted debt/EBITDAR would total 3.5x at close and would decline to 3.1x by the end
of FY16.
Leveraged Recapitalization. Our published estimates assume Walgreens issues $14.6bn
in debt in FY15 (a full turn of EBITDAR), $8.7bn more than the $4.9bn needed for
completion of the Alliance Boots transaction. We assume this debt is pooled with
available cash to complete $14.3bn of share repurchase (on September 1, 2015, day one
of FY16). For FY16 we model debt reduction of $3 billion and EBITDA growth of $1bn,
to $14.3bn, reducing the lease-adjusted total debt/EBITDAR ratio to 3.7x by year end.
As we move forward, we expect debt reduction of $1bn per year and continued EBITDA
growth will drive the leverage ratio to 3.4x in FY17 and 3.2x in FY18.
Transaction Costs. Our analysis does not include costs associated with the treatment of
existing bonds in the event that the pro forma entity seeks to align the issuance
structure, since there are a variety of options available to accomplish this goal. In similar
situations, where companies have sought to align the issuance structure, our credit
team has seen existing bonds either kept in place with added guarantees, exchanged for
bonds at a new issuing entity or taken out (and replaced with bonds issued at a new
entity). We estimate the most expensive option, based on current make-wholes, could
be up to $255 million.

18 June 2014 32

FIGURE 22
Pro Forma Balance Sheet


WAG Al l i ance Boots Adj ustments Pro Forma
8/31/15 8/31/15 Transacti on Fi nanci ng 8/31/15
Total Assets
Cash and market securities $4,694 $2,459 $0 ($5,201) $1,952
Accounts receivable, net $2,884 $4,510 $0 $0 $7,394
Inventories $7,507 $3,354 $0 $0 $10,861
Other current assets $272 $307 $0 $0 $579
Total current assets $15,357 $10,631 $0 ($5,201) $20,787
Net Property and equipment $12,300 $3,837 $0 $0 $16,137
Goodwill $2,455 $7,770 $0 $0 $10,225
Other Intangible Assets $0 $8,555 $0 $0 $8,555
Transaction Goodwill $0 $0 $8,047 $0 $8,047
Transaction Identifiable Intangibles $0 $0 $2,012 $0 $2,012
Investments in Alliance Boots $7,708 $0 ($7,708) $0 $0
Other non-current assets $2,746 $867 $0 $0 $3,613
Total Assets $40,566 $31,659 $2,350 ($5,201) $69,374
Li abi l i ti es And Sharehol ders' Equi ty
Trade accounts payable $5,078 $7,510 $0 $0 $12,588
Short term borrowings $577 $506 $0 $0 $1,083
Accrues expenses and other liabilities $3,919 $20 $0 $0 $3,939
Income tax $154 $222 $0 $0 $376
Total current liabilities $9,728 $8,257 $0 $0 $17,985
Long term Debt $3,939 $9,146 $0 $0 $13,085
Deferred income tax $878 $1,312 $0 $0 $2,190
Other non-current liabilities $2,265 $599 $0 $0 $2,864
Total Other Liabilities $7,082 $11,057 $0 $0 $18,139
Total Liabilities $16,810 $19,315 $0 $0 $36,124
Shareholders Equity $23,756 $12,345 ($13,387) $10,537 $33,250
Total Liabilities and Stockholders Equity $40,566 $31,659 ($13,387) $10,537 $69,374
Leverage Stati sti cs:
Lease Adjusted Total Debt $25,540 $15,016 $40,556
Total Debt $4,516 $9,652 $14,168
Net Debt ($178) $7,193 $12,215
Total Capitalization $28,272 $21,996 $47,418
Total Debt/Total Capitalization 16% 44% 30%
Lease Adjusted Total Debt/EBITDAR 2.6x 4.6x 3.1x
Total Debt/EBITDA 0.6x 3.8x 1.4x
18 June 2014 33
FIGURE 23
Capital Deployment Scenarios

Adopting the more aggressive approach to capital structure and deployment outlined
here represents a significant incremental opportunity, above and beyond guidance
provided by Walgreens at the time of the transaction. This scenario contributes $0.34 to
our FY16 EPS estimate. Combining this with ongoing repurchase activity drives a total
benefit of $0.55 and $0.77 in FY17 and FY18 EPS, respectively.
FIGURE 24
Incremental Opportunity: Capital Structure

Closing (yr-
end FY15)
2016 2017 2018
Closing (yr-
end FY15)
2016 2017 2018
Dividends (1,310) (1,840) (2,225) (2,530) (1,310) (1,674) (2,019) (2,288)
Share Issuance (repurchase) (320) (4,708) (3,160) (4,080) (320) (14,300) (3,160) (4,080)
Net Debt issuance (reduction) 5,000 (3,000) (1,000) (1,000) 14,592 (3,000) (1,000) (1,000)
Total 3,370 (9,548) (6,385) (7,610) 12,962 (18,974) (6,179) (7,368)
Lease adjusted total debt $45,557 $43,876 $44,262 $44,716 $55,149 $53,468 $53,854 $54,308
Total Debt $19,168 $16,168 $15,168 $14,168 $28,760 $25,760 $24,760 $23,760
EBITDA $9,832 $10,847 $12,069 $13,274 $9,832 $10,847 $12,069 $13,274
EBITDAR $13,131 $14,311 $15,706 $17,093 $13,131 $14,311 $15,706 $17,093
Lease Adj. Tot Debt/EBITDAR 3.5 x 3.1 x 2.8 x 2.6 x 4.2 x 3.7 x 3.4 x 3.2 x
EPS $4.23 $4.87 $5.95 $6.90 $4.23 $5.51 $6.71 $7.79
$5bn Debt Issuance One Turn of Leverage
(Target leverage 4.2x at deal closing) (Target leverage 3.5x at deal closing)
Leverage Component FY16 FY17 FY18 Note
Dividends (1,674) (2,019) (2,288)
Share Issuance (repurchase) (14,300) (3,160) (4,080) FY16 repo via increase in leverage, FY17 and FY18 repo via cash flow
Net Debt issuance (reduction) (3,000) (1,000) (1,000)
Total (18,974) (6,179) (7,368)
Incremental interest expense -584 -584 -584 Incremental debt at 4.5%
Net income accretion -368 -368 -368
No. of repurchased shares from leverage 130 0 0 Repurchase attributable to leverage recap
No. of shares - assumption 973 955 932
Lease-adj debt/EBITDA ratio 3.9 x 3.4 x 3.5 x Additional leverage increases ratio from 3.1 to 4.2x at deal closing
EPS accreti on $0.34 $0.55 $0.77
Assumes debt issuance of $13.6bn at time of close. Repayment of $5bn
FY16-FY18
18 June 2014 34
3. Inversion: Benefits, Structures, Possibilities & Probabilities
We believe the most logical and effective corporate structure for a combined Walgreens
and Alliance Boots would be to invert the existing configuration so that Alliance Boots
becomes Walgreens parent corporation. However, as currently structured, the Walgreens
Alliance Boots transaction will not constitute an inversion, necessitating that the terms and
structure of the transaction are restructured prior to completion. While this represents a
material hurdle, we believe that the substantial benefits unlocked via inversion provide a
strong incentive for all parties to align to achieve it.
Inversion Benefits
Inversion of a U.S. based multi-national corporation occurs when a U.S. parent corporation
either merges with a foreign corporation (effectively changing its domicile) or, more
commonly, flips its relationship with a foreign subsidiary so that the foreign subsidiary
becomes the parent and the U.S. corporation becomes a subsidiary. The primary benefits of
inversion are 1) previously trapped deferred profits outside the U.S. (existing and future
profit flows) are made more available to the new foreign corporate parent for share
repurchase, dividends and unrestricted worldwide investment without requiring that
ongoing US tax is paid on their repatriation and 2) intercompany debt may be issued by the
US domestic subsidiary to shield U.S. profits, in what is commonly referred to as earnings
stripping. Given these substantial benefits, we believe the most logical and effective
approach for the combined Walgreens and Alliance Boots would be to invert the existing
corporate structure and cause Alliance Boots to become Walgreens parent corporation.
We believe the largest incremental benefit to the combined entity will come from
recapitalising the equity ownership stake in the U.S. subsidiary with inter-company
debt. Said another way, the Alliance Boots parent company that emerges after inversion
would recapitalize a significant part (perhaps 50% or more) of its equity ownership in
the Walgreens U.S. subsidiary with inter-company debt. Whereas a subsidiary capitalized
with equity issues non-deductible dividends to its parent (which do not reduce the
subsidiarys taxable income and also may attract withholding taxes), interest payments
to the foreign parent can be deducted by the US subsidiary annually against a portion of
the subsidiarys taxable income equivalent to roughly 50% of its EBITDA, (with certain
adjustments prescribed under US Internal Revenue Code Section 163(j)).
Note, the Obama administrations 2014 budget proposal from April 2013 proposed
reducing the threshold from 50% to 25%. Our research indicates there is a little
momentum for a legislative change in this threshold in 2014 (and no path for statutory
changes) though announcements of large inversions could increase support for
legislative action in 2015. In our view, however, broad corporate tax reform becomes
more likely as we look out to 2016. Should Walgreens have concerns relative to
implementation of this and other changes to the qualifications for inversion in 2015, the
company could seek to adjust the terms to complete the transaction by December 31,
2014.
Inversion Qualification
As currently envisioned (Figure 32), the Walgreens Alliance Boots transaction will not
constitute an inversion, necessitating that the deal be restructured prior to completion,
owing to two factors. First, we note that the transaction would need to be restructured so
that Walgreens becomes the subsidiary of a foreign parent: Alliance Boots or a new foreign
parent (we outline an example structure later in this section). Second, and more pressing, is
that guidance issued by the Internal Revenue Service under Section 7874 regarding
expatriated entities and their foreign parents establishes an ownership test whereby an
18 June 2014 35
inversion will not achieve the desired tax benefits if the inverted US corporations
shareholders receive more than 80% of the foreign parent entitys shares.
Terms of the original agreement. Under Phase 1, on August 2, 2012, Walgreens
purchased 45% of Alliance Boots equity in return for $4bn in cash and 83.4mn WAG
shares. As of November 11, 2013, Stefano Pessina held 72,959,594 shares, or 7.7% of
common shares outstanding and KKR held 6,424,340, or 0.7% of common shares. For
the purposes of determining ownership by a foreign entity in Phase 2, WAG shares
received by Stefano Pessina and KKR in Phase 1 are now counted as ownership in the
domestic entity of WAG, not Alliance Boots (again, it is the ownership of the foreign
company, not the domicile of the shareholder that is being measured). Walgreens
currently possesses an option to acquire the remaining 55% of Alliance Boots,
exercisable during a six-month window running from February 2 of 2015 to August 2 of
2015. Under Phase 2, as currently structured, Walgreens will pay GBP 3.1bn in cash and
issue 144.3mn WAG shares, while also assuming any outstanding Alliance Boots net
debt.
1) The structure must be changed so that Walgreens becomes a subsidiary of a foreign
parent. Given that Phase 2 contemplates Walgreens acquiring the remainder of the Alliance
Boots stock, inversion will require that Walgreens, Alliance Boots and KKR agree to
restructure the terms of the transaction prior to completion, so that Alliance Boots, or
another foreign corporation, becomes the (foreign) parent.
2) The terms must be restructured so that the US corporations shareholders receive less
than 80% of the foreign parent entitys shares. Given that the inquiry focuses on what the
US corporation shareholders receive in respect of their US corporation stock, WAG shares
issued to Stefano Pessina and KKR under Phase 1 (the purchase of 45% of Alliance Boots)
would count toward the 80% threshold. (In contrast, if Step 1 had contemplated a
purchase of WAG shares by Alliance Boots, the original ownership of Alliance Boots shares
by Stefano Pessina and KKR would have effectively mitigated the possibility of an ultimate
inversion reaching the 80% threshold).

FIGURE 25
Head-to-Head Comparison: Current Structure vs. Potential Inverted Structure

*Note: In order to qualify for US tax benefits of an inversion, the agreement must be restructured so Alliance Boots or a
newly created foreign parent becomes the top company and the existing Walgreens shareholder group receives less
than 80% of the stock of Alliance Boots in Step II.

Current Structure, Upon Completion of Transaction
Alliance Boots
(Switzerland)
Walgreens
(U.S.)
87% Ownership
WBAD
(Switzerland)
Former Domestic Co
Shareholders
13% Ownership*
Former Foreign Co
Shareholders
100% Ownership
50% Ownership
50% Ownership
Inverted Walgreens/Alliance Boots Structure
WBAD
(Switzerland)
Merger Co./Walgreens
(U.S.)
<79.9% Ownership
Former Domestic Co
Shareholders
>20.01% Ownership*
Former Foreign Co
Shareholders
Alliance Boots
Switzerland)
100% Ownership 100% Ownership
18 June 2014 36
Walgreens Alliance Boots Impact
Before walking through the complicated (but achievable in our mind) changes in deal
structure that would be necessary to accomplish inversion, we first define the sizable
benefits which are likely to drive consideration of a restructuring. As stated above the
key value drivers of inversion are the ability to unlock trapped foreign earnings for corporate
purposes (which can substantially increase the shareholder utility/benefit of transfer pricing
strategies) and the ability to reduce US tax payments via issuance of intercompany debt.
Upon inversion, recapitalizing Walgreens enables a substantial reduction in U.S.
taxes. Should Walgreens and Alliance Boots successfully adopt an inverted structure in
which a Switzerland based Alliance Boots foreign parent (or newly created parent
company), owns the equity of a Walgreens U.S. subsidiary, we expect that the
companies will recapitalize the Walgreens subsidiary with debt (WAG issues inter-
company debt to the offshore parent) in order to take advantage of the US deductibility
of interest payments (and associated withholding tax savings). The earnings stripping
rules of Internal Revenue Code section 163(j) stipulate that net interest expense
associated with such debt (considered together with interest expense on other
indebtedness) must be less than 50% of adjusted taxable income (defined as taxable
income prior to deduction of interest, NOL, depreciation and depletion, or effectively
EBITDA) to ensure current deductibility. Put another way, as much as 50% or more of
Walgreens annual adjusted taxable income (which would otherwise be paid as a
taxable dividend to the Alliance Boots parent) may be effectively exempted from U.S.
income taxes by recapitalizing Walgreens with intercompany debt.
We size Walgreens cash tax savings attributable to inversion enabled recapitalization
at $783mn. To get to this number, we assume that Walgreens is able to take advantage
of the current deductibility of interest expense payable on debt held by a foreign parent
(inter-company debt) equal to 47.5% of FY16 adjusted taxable income of $8,240mn (we
assume less than 50% in order to account for existing WAG debt) and that the
differential in tax rates between U.S. based Walgreens and Switzerland based Alliance
Boots is 20%.
A few notes on the tax rate assumption: 1) The U.S. tax rate for WAG is currently
close to 37% while the underlying Alliance Boots tax rate is roughly 18%, suggesting
a delta of 19%. 2) We believe the benefit from the differential could actually be in
excess of 20% given that income paid in the canton of Zug [where Alliance Boots
GMBH is domiciled] may be exempt from federal level taxation and that further tax
rate reductions may be applicable to holding companies. 3) While the corporate tax
rate of Switzerland is more attractive than that of the U.K., the US-UK income tax
treat may provide advantageous treatment of withholdings on tax dividends. Should
the inverted entity be domiciled in the U.K., we expect the tax rate would be 19%,
suggesting an 18% delta. We view both options as attractive from a tax benefit
perspective.
18 June 2014 37

FIGURE 26
FY16 EPS Sensitivity to Inversion Scenario Assumptions Incremental EPS Contribution

Inversion unlocks trapped cash, enabling multinational corporations to prioritize
investment based on return, not geography. As mentioned previously, the major
drawback to deferring payment of U.S. taxes on income earned by foreign subsidiaries
abroad is that the profits/cash are generally trapped outside the U.S. With an inversion,
corporations are generally no longer bound going forward by the U.S. taxes on global
earnings and so worldwide profit and cash flow is available for more efficient corporate
purposes including investment, dividend issuance and share repurchase. For the
purposes of our model, inversion enables us to maximize leverage and share repurchase
across the global enterprise. This capability becomes more essential/valuable over time
as we expect strong free cash flow generation at both Walgreens and Alliance Boots
(and potential transfer pricing benefits) would lead to the accumulation of significant
offshore cash balances.
Inverting the current Walgreens/Alliance Boots structure may entail one-time US tax
costs. We foresee several possible tax triggers and several mitigating strategies. Of
most concern is recapitalizing the Walgreens subsidiary in Switzerland which could
result in withholding taxes of up to 5% of the refinanced equity or allotted profits. While
withholding taxes on dividends paid from U.S. subsidiaries to Swiss parents are set
under the U.S.-Switzerland treaty at 5%, the U.S.-U.K. treaty provides for a 0%
withholding tax rate for U.K. parent companies meeting certain requirements. While this
would favour domiciling in the U.K., the requirements for qualifying include a one-year
holding period for the subsidiaries stock, which means that Alliance Boots would have
to wait a full year before taking advantage of the benefits enabled via refinancing (other
requirements include parent company U.K. residency and listing on several enumerated
exchange (including the London Stock Exchange). It is also worth noting that the
transaction is unlikely to qualify as tax free to domestic Walgreens shareholders, who
are likely to incur capital gains taxes as a result of inversion.
Adjusting Terms for Inversion Qualification
We believe there are several possible scenarios for renegotiating Walgreens Phase 2
purchase option (and the broader agreement) to meet the requirements for a successful
inversion, but note that alignment between Walgreens, Alliance Boots and the
shareholders/owners of these two entities is a prerequisite for change. Recall that the
two key changes needed to enable inversion are 1) Walgreens becomes a subsidiary of a
foreign parent i.e. the transaction must be structured so that Alliance Boots or a newly
created foreign entity acquires all Walgreens stock in return for stock in the new foreign
entity or other consideration and 2) the US corporations shareholders receive less than
80% of the foreign parent entitys shares - i.e.: Alliance Boots shareholders, primarily KKR,
must accept stock rather than cash compensation, and WAG shareholders must accept
Tax rate di fferenti al
$782.76 12% 14% 16% 18% 20% 22%
30.0% $0.44 $0.50 $0.55 $0.61 $0.67 $0.72
35.0% $0.50 $0.56 $0.63 $0.69 $0.76 $0.82
40.0% $0.55 $0.63 $0.70 $0.78 $0.85 $0.93
45.0% $0.61 $0.69 $0.78 $0.86 $0.94 $1.03
47.5% $0.64 $0.73 $0.81 $0.90 $0.99 $1.08
50.0% $0.72 $0.82 $0.91 $1.00 $1.10 $1.19
% of WAG EBITDA
subj ect to earni ngs
stri ppi ng
18 June 2014 38
exchanging their WAG stock for a combination of stock in the new company and a cash
payment.
1) We believe the most efficient mechanism for achieving these goals would be a
cash/stock election via which Alliance Boots acquires Walgreens Shares. In this scenario,
Alliance Boots would issue debt and use resulting cash to acquire all shares of Walgreens
via a cash/stock election structured to ensure that Walgreens shareholders receive less than
80% ownership in the new foreign parent. Walgreen shareholders would be able to elect
the form of consideration, cash or stock, that they prefer to receive in exchange for
conversion of their shares in the merger entity. This option could be attractive for current
Walgreens shareholders, as gains on WAG shares at the time of inversion are likely to be
taxable and a cash/stock election would provide investors with liquidity to satisfy any
resulting tax liabilities.
FIGURE 27
Cash/Stock Election Enables Inversion Qualification
Should KKR and Stefano Pessina accept shares in the new foreign entity in lieu of
cash (GBP 3.133bn, or roughly $4.9bn USD), foreign ownership increases from
13.2% to 18.7%. We believe that achieving inversion in an efficient manner will require
that KKR, whom we expect will receive the majority of cash issued as part of the second
step of the transaction, agree to accept shares in the new foreign entity in lieu of cash, a
substantial concession. While KKR would likely prefer cash, we believe the company
would be amenable to accepting WAG shares given the magnitude of the potential
earnings benefit from inversion. We note that the original purchase agreement
stipulated that KKR can sell shares from the first step during a period beginning August
2, 2014 and ending February 2, 2015, however KKR would need to retains its shares
through Phase 2 to enable inversion.
In order to increase the foreign ownership of the new foreign entity from 18.7%, held
by Stefano Pessina and KKR, to 21%, Walgreens share base must be reduced by
14.6%. As such, the parameters set for the cash/stock election would need to reduce
the share count by 139mn shares, equating to $10.2bn in cash based on a price of $73.
We expect that AB would issue $5.3bn in debt to fund the election ($10.2bn of cash to
WAG shareholders less $4.9bn of cash that will no longer be paid to KKR and Stefano
Pessina as outlined above). Assuming all WAG shareholders elected a mix of cash and
Cash/Stock Election At Close Note
Stock for Cash
FY16 WAG Shares 953.1 WAG Base
Step II Shares to AB 144.3 144mn foreign co shares issued to AB
Shares in Lieu of Cash to AB 66.9 KKR and SP agree to accept 64.5mn foreign co.shares in lieu of 4.9bn cash
Assumed WAG share price $73.29
Total Shares i n Forei gn Co 1164.3 Total Shares post issuance
% WAG ownership in Foreign Co 82% Walgreen Shareholders own more than 80%
% AB and KKR ownership in Foreign Co 18% AB ownership must be increased to >20%
Cash/Stock El ecti on
Retired WAG Stock (to achieve 79%) 139.1
Total Shares i n Forei gn Co 1025.2
% WAG ownership in Foreign Co 79%
% AB and KKR ownership in Foreign Co 21% AB and KKR ownership increases to 21%
Cash saved by issuing KKR and SP shares $4.90
Cash needed to fund election ($10.2)
Debt i ssued by Al l i ance Boots ($5.3) Net debt issued to fund cash/stock election
Election structured to provide each WAG shareholders with 0.85 shares in new
foreign co and $10.39 in cash - 139.1mn WAG shares are retired at a cost of
$10.2bn, resulting in total foreign company shares out of 1,025mn
18 June 2014 39
stock, each shareholder would receive 0.85 shares in the new foreign entity and $10.20
in cash.
Given that our model already assumes that Walgreens will increase leverage with the
close, we do not adjust our model for added debt/interest expense related to the
cash/stock election, but rather adjust for less share repurchase. Funding inversion
reduces share repurchase in FY16 by $5.0bn (50m shares at our assumed price of $100)
while paying KKR and SP with stock in lieu of cash increases shares by 74mn, resulting
in a net increase of 124mn shares vs our base model. This increase is offset by the
132mn of WAG shares retired via the cash portion of the cash/stock election.
Consequently, the total impact of the cash/stock election and inversion on shares in the
new company is a reduction of 8mn.
2) An alternative method for increasing foreign ownership could involve the purchase of
additional foreign operations, however we view this as less attractive than cash/stock
election. In this scenario, Alliance Boots would acquire both a foreign asset and Walgreens.
The most obvious candidate for acquisition would be Galenica Group, a Swiss logistics,
pharmacy and healthcare IT provider which was formerly an associate of Alliance Boots but
was expressly excluded from Walgreens purchase of the company (Galenica was
distributed from Alliance Boots to AB Acquisition Holdings in May of 2013). Galenica Group
currently trades on the SIX Swiss Exchange (Ticker GALN). As of December 31, 2013,
Alliance Boots Investments 2 Gmbh, a holding company established in Bern by Stefano
Pessina, held 1.656mn shares, or 26% of registered shares. Galenica Groups market
capitalization as of May 28th was $6.4bn. We view this option as less favourable for three
reasons 1) we do not believe acquiring Galenica alone would reduce domestic ownership to
less than 80%, 2) our analysis of Galenica suggests that even if Alliance Boots were to
acquire the company at the current market value (i.e. without a premium) the transaction
would be dilutive, wiping out a significant portion of inversion benefits, and 3) acquiring
Galenica could be implicated in anti-avoidance provisions under the inversion rules.
3) Finally, another possibility for qualifying for inversion if an exchange of Walgreens
stock for Alliance Boots stock would fail to come in under the 80% threshold, could
involve creation of an independent REIT or divestiture of Walgreens substantial real
estate holdings in a spinoff transaction. However, divesting real estate assets could be
disregarded for purposes of testing the inversion if it is considered to occur in connection
with acquisition of WAG stock and could possibly be implicated in anti-avoidance
provisions under the inversion rules. As of August 31
st
, 2013, the company owned
approximately 20% of its retail drugstore locations, or approximate 1,716 stores. Were
Walgreens to spin off or sell its real estate holdings (perhaps creating or selling to a REIT
with lease back provisions), the company would reduce its shareholder base relative to
post-inversion ownership of Alliance Boots. While there may be a safe route to
restructuring real estate holdings in a way that does not create significant transaction costs
or risks, we view this option as more difficult than the previously discussed adjustments to
terms between Walgreens and Alliance Boots.

Given the complexity of the structure, we believe that a solution will only be found if
Walgreens, Alliance Boots and KKR are able to align their interests in a way that leads to
a restructuring and inversion that is mutually beneficial to them and to shareholders.

Adjusting Structure for Inversion Qualification
Assuming that the terms of the Walgreens-Alliance Boots agreement can be adjusted in
such a way as to qualify for inversion, we believe there are numerous paths to
reconfiguring the current corporate structure to achieve inversion. Within this section,
we outline one potential approach for migrating the current Walgreens-Alliance Boots
structure to an inverted configuration with substantially greater tax efficiencies. Our intent
18 June 2014 40
is to show both that a pathway exists and to provide perspective on the complexity
encountered along such a pathways.
A five step process for inverting Walgreens Alliance Boots. The process for converting
from operating as Walgreens, a U.S. based multinational, to Walgreens, a Switzerland based
multinational with Walgreens as a wholly-owned subsidiary:
FIGURE 28
The Inversion Five-Step Enables Tax Efficiencies (A Potential Scenario)
1. Alliance Boots forms U.S.-based Merger Company subsidiary in Illinois or Delaware.
2. Walgreens merges with the new Merger Company, becoming a U.S. subsidiary of
Alliance Boots.
3. Alliance Boots (the Switzerland-based parent) issues shares in the new combined
entity to Walgreens and Alliance Boots shareholders, inverting corporate structure.
The Alliance Boots foreign parent could potentially adopt the Walgreens Europe name
at this time. Note: Owing to the original terms of the transaction, Walgreens would
have a 45% hook stock ownership in its corporate parent (stemming from Walgreens
original 45% stake in Alliance Boots). This ownership stake would likely be
intentionally diluted (or used to acquire outstanding Walgreens shares) when Alliance
Boots issues share in the new combined entity in this step.
4. WBAD restructured with 50% Walgreens interest transferred to Alliance Boots
parent company in U.K. We expect Walgreens 50% ownership in WBAD would be
transferred to Alliance Boots so as to avoid taxation in the U.S. Walgreens may
distribute this ownership stake to Alliance Boots, or Alliance Boots would pay
Walgreens for the value of the WBAD ownership stake, thus triggering some inversion
gain (subject to tax without offset by losses); however we expect any gain would be
relatively minor owing to the limited history of profits at WBAD. A distribution of the
WBAD interest could have US withholding tax consequences, which may work in favor
of effecting the transaction as a taxable sale of the Walgreens WBAD interest to
Alliance Boots.
5. Recapitalize the U.S. Walgreens subsidiary. Recapitalize Alliance Boots/Walgreens
Europes U.S. subsidiary, moving from equity (which pays a non-deductible dividend to
the parent) to a mixture of debt and equity (with interest payments on inter-company
debt deductable for U.S. tax purposes). A recapitalization of the magnitude envisioned
Step 2: Merger Co. merges with Wallgreen Step 1: AB forms U.S. based Merger Co.
Alliance Boots
(Switzerland)
Walgreens
(U.S.)
92% Ownership
WBAD
(Switzerland)
Former Domestic Co
Shareholders
8% Ownership*
Former Foreign Co
Shareholders
50% Ownership
50% Ownership
Merger Company
(U.S. Subsidiary of AB)
Alliance Boots
(Switzerland)
Walgreens
(U.S.)
WBAD
(Switzerland)
Merger Company
(U.S. Subsidiary of AB)
1 1
2
Step 3 - 5: Invert WAG, Restructure WBAD and
Recapitalize Merger Co.
WBAD
(Switzerland)
(U.S.)
<79.9% Ownership
Former Domestic Co
Shareholders
>20.01% Ownership*
Former Foreign Co.
Shareholders
Alliance Boots
(Switzerland.)
100% Ownership
3 4
5
Recapitalize Merger Co.
Equity with Debt
18 June 2014 41
here could have material US withholding tax consequences to the extent the
recapitalization causes a dividend distribution under US tax laws (as outlined in our
discussion of terms above).
As compared to the current transaction structure, an inverted Walgreens/Alliance Boots
enables large tax efficiencies and frees foreign profits for corporate purposes, including
investment, dividend issuance and share repurchase. Examining the head-to-head
comparison in the following figure, the inverted entity would pay Swiss taxes on all WBAD
and Alliance Boots earnings and could shield roughly 50% of Walgreens U.S. earnings from
U.S. taxation annually via intercompany debt (taxes will be paid at Swiss rates).

FIGURE 29
One of Many Potential Inverted Structures

Source:
*Note: In order to qualify for US tax benefits of an inversion, the agreement must be restructured so Alliance Boots or a
newly created foreign parent becomes the top company and the existing Walgreens shareholder group (including
shares issued to KKR and Stefano Pessina in Phase 1) receives less than 80% of the stock of Alliance Boots in Phase II.
While the benefits are substantial, we again note that reconfiguring the terms of the
Walgreens Alliance Boots transaction and the corporate structure of the joint entity is a
complex undertaking and one that is unlikely to be successful unless the Boards of both
Walgreens and Alliance Boots, as well as KKR are aligned to achieve such an outcome.
We are encouraged by Walgreens managements recently stated willingness to consider
inversion as stated at our April 30
th
session at the Barclays Retail & Consumer Discretionary
Conference, which marked a major shift of tone relative to all prior commentary, including
that on the March 25
th
conference call. While we view this as a positive development, we
expect that continued shareholder (and analyst) pressure will be necessary to help drive this
process.
Inverted Walgreens/Alliance Boots Structure
WBAD
(Switzerland)
(U.S.)
<79.9% Ownership
Former Domestic Co
Shareholders
>20.01% Ownership*
Former Foreign Co
Shareholders
Alliance Boots
Switzerland)
18 June 2014 42
FIGURE 30
Incremental Opportunity: Inversion

Inversion Scenario FY16 FY17 FY18 Note
WAG-only EBITDA 8,240 8,652 9,084 EBITDA at time of recapitalization
% of EBITDA on earnings stripping 47.5% 48% 48% We assume 47.5%, below the maximum of 50% to allow for existing debt
WAG EBITDA shielded by earnings stripping 3,914 4,109 4,315 Amount of EBITDA that can be shielded
Tax rate - foreign parent 17% 17% 17%
Tax differential from US tax rate 20% 20% 20%
Tax savings 783 783 783
Non-inversion tax expense 2,556 2,648 3,038
% Non-inversion effective tax rate 35% 31% 32%
Post-inversion tax expense 1,774 1,865 2,255
% Post-inversion effective tax rate 24% 22% 24%
EPS accreti on $0.99 $1.12 $1.27
% EPS accreti on over Base Case EPS 18% 17% 16%
Includes benefit of increased share repurchase enabled by 1) additional
EBITDA and 2) cash/stock election (retiring of WAG shares)
Assuming 17% tax rate at the foreign parent level on interest income (from
intercompany debt)
We assume that the capital structure remains constant post FY16. The
company may be able to recap additional equity as EBITDA grows.
18 June 2014 43
Appendix I: WAG/AB/ABC Overview
Walgreens Alliance Boots AmerisourceBergen
Walgreens purchased 45% of U.K. based retail pharmacy operator and wholesale drug
distributor Alliance Boots on August 2, 2012, and formed the Walgreens Boots Alliance
Development GmbH (WBAD) joint venture global sourcing entity in Bern, Switzerland, on
October 30, 2012. On March 19, 2013, Walgreens and Amerisource announced a 10-year
distribution agreement as part of which Amerisource would take on both Walgreens brand
distribution (previously served by Cardinal) and generic distribution (previously sourced from
manufacturers by Walgreens and distributed via Walgreens own distribution network) while
moving to purchase all generic products via the WBAD global sourcing entity.
As part of the agreement, Walgreens committed to purchasing 7% of ABC shares on the
open market (3.5% had been purchased as of December 31, 2013; Walgreens gains a
board seat upon acquiring 5%) and ABC issued Walgreens and Alliance Boots warrants
equal to 16% of ABC shares outstanding. Fifty percent of the warrants are exercisable in
March 2016, at which point Walgreens will gain an additional board seat and 50% are
exercisable in March 2017. At that point, Walgreens would own 23% of Amerisource
shares outstanding, or likely more if Amerisource continues its share repurchase activity at
historical levels. The two companies have a standstill agreement under which Walgreens
may accumulate no more than 30% of Amerisource shares, although the agreement can be
amended upon agreement by the two parties.
FIGURE 31
Walgreens Alliance Boots Amerisource Bergen Ownership Structure and Drug Sourcing Flow

Alliance
Boots
Walgreens
Amerisource
WBAD
(Switzerland)
Ownership Sourcing
WAG purchase of 7% of ABC
Warrants to purchase 8% in
2016 and 8% in 2017
Alliance
Boots
Walgreens
Amerisource
AB 50% ownership
of WABD
Minority Partner
WAG 50%
ownership of WABD
Majority Partner
(50% share + 45% of
ABs 50% share = 72.5%)
WBAD
(Switzerland)
WAG owns 45% of AB
Likely to purchase
remaining 55% mid-2015
Brand
Pharma
Specialty
Pharma
Brand
Pharma
Generic
Pharma
18 June 2014 44
As seen in Figure 31, Walgreens currently owns 45% of Alliance Boots, and the
companies partnership agreement allows for Walgreens to purchase the remaining 55%
in 2015. With respect to the WBAD JV, Walgreens and Alliance Boots are 50:50 partners,
but as WAG owns 45% of Boots, the companys total ownership of WBAD is 72.5%;
consequently, Walgreens consolidates WBAD results. With respect to Amerisource,
Walgreens owns 7% of shares outstanding and Walgreens and Alliance Boots each have
warrants worth 4% of outstanding shares that may be executed in 2016 and 2017 (for the
purposes of the Figure below we have shown the entire 8% ownership under Walgreens as
we expect the company will have completed the acquisition of Alliance Boots by that time).
Transaction Structure
Under Phase I, Walgreens purchased 45% of Alliance Boots equity in return for $4bn in cash
and 83.4mn WAG shares on August 2, 2012. As of November 11, 2013 Stefano Pessina,
held 72,959,594 shares, or 7.7% of common shares outstanding and KKR held 6,424,340, or
0.7% of common shares. For the purposes of determining ownership by former
shareholders, the WAG shares received under Phase 1 would be counted as ownership by
the domestic entity of WAG, not Alliance Boots in phase II (again, it is the ownership of the
foreign company, not the domicile of the shareholder that is being measured). Walgreens
currently possesses an option to acquire the remaining 55% of Alliance Boots, exercisable
during a six-month window running from February 2 of 2015 to August 2 of 2015. Under
Phase 2, as currently structured, Walgreens will pay GBP 3.1bn in cash and issue 144.3mn
WAG shares, while also assuming any outstanding Alliance Boots net debt.

FIGURE 32
Walgreens Alliance Boots Two-Step Transaction


Step 1
Alliance Boots
(Switzerland)
Walgreens
(U.S.)
92% Ownership
WBAD
(Switzerland)
US Shareholders
8% Ownership*
Foreign Shareholders
(Foreign Co.)
50% Ownership
50% Ownership
Step 2
Alliance Boots
(Switzerland)
Walgreens
(U.S.)
87% Ownership
WBAD
(Switzerland)
US Shareholders
13% Ownership*
Foreign Shareholders
(Foreign Co.)
100% Ownership
50% Ownership
50% Ownership
18 June 2014 45
Appendix II: Tax Matters - Deferred Profit and Transfer
Pricing
Deferred Profit and Trapped Foreign Cash
U.S. taxation of foreign profits provides an incentive to hold U.S. earnings offshore.
Global profits of U.S. multi-national corporations, including the profit of foreign subsidiaries,
are subject to a federal statutory tax rate of 35%, regardless of where those profits are
generated. However, under the U.S. tax code, active profits earned by foreign entities
outside the U.S. are not subject to tax until those profits are repatriated. Domestic
companies may indefinitely defer U.S. taxes on foreign earnings by permanently reinvesting
foreign profits offshore. This ability to defer tax on income earned outside the U.S. provides
an incentive for U.S. multi-nationals to hold U.S. earnings at foreign subsidiaries located in
lower tax jurisdictions.
P&L Benefit: Profit Consolidated, Not Taxed. From an accounting perspective, U.S.
corporations accrue no taxes until foreign profits are repatriated. As such, while
revenue and profits of foreign subsidiaries are consolidated on the P&L, taxes on foreign
profits are not accrued (or paid) for those profits that are not repatriated to the U.S.,
leading to a lower effective tax rate. Note that foreign subsidiaries will pay territorial
taxes in the country in which they operate but that these rates are typically below U.S.
rates, i.e.: the UK at 21%, declining to 20% April 1, 2015 (with the Patent Box reducing
tax on U.K. derived patents to 10%) and Switzerland at 7.5%-17.5% (with corporations
sometimes able to obtain waivers/incentives which reduce rates to the low single
digits).
Cash Flow Drawback: Foreign Trapped Profit. The major drawback to deferring
payment of U.S. taxes is that the profits/cash earned by foreign subsidiaries are
effectively trapped outside the U.S. and may not be brought back to the U.S. without
paying a tax penalty (the U.S. tax rate of 35% less a credit for any territorial taxes
previously paid). While multi-nationals may invest foreign profits overseas, this tax
strategy may lead to accumulation of substantial foreign trapped cash balances for
those companies whose offshore cash flow generation significantly exceeds offshore
capital needs and investment opportunities.
Walgreens Impact. Post completion of the Walgreens - Alliance Boots transaction, we
expect Walgreens will defer/permanently reinvest offshore all profits generated by
Alliance Boots and the WBAD generic sourcing entity, avoiding the tax inefficiencies that
would occur were Walgreens to repatriate profit to the U.S. While this will have the effect
of reducing Walgreens consolidated tax rate, we note that the effect is optical in nature, as
taxes paid and profits collected will be equal to the sum of the previously independent
companies. While Walgreens may use profits earned outside the U.S. to make foreign
investments (such as the purchase of Farmacias Ahumada), reduce Alliance Boots foreign
debt holdings and perhaps make intercompany loans, the company will not have access to
foreign trapped profit for corporate purposes such as repurchasing shares or paying
dividends.
The limitations of trapped profit are particularly acute for those companies who
generate strong free cash flow and have limited capital needs. Under the current
structure, we project that Walgreens and Alliance Boots will generate free cash flow of
$5.0bn in FY16 (prior to a potential payment of $584mn to execute warrants for
AmerisourceBergen shares), with more than $1.4bn generated by foreign subsidiaries
(formerly Alliance Boots). Given relatively low incremental capital needs, we expect that
Walgreens will quickly build substantial offshore cash balances which while are available
18 June 2014 46
for offshore acquisition activity but will not be accessible for U.S. corporate purposes
(offshore cash may also be utilized for repayment of foreign debt).
Item of Note: Determining Tax Residency. The U.S. determines where a corporation is
domiciled on the basis of location of filing of incorporation, regardless of where the
companys headquarters may be located, whereas most European countries determine
tax domicile on the basis of where the companys headquartered are based or where the
company is managed. It is this inconsistency that has enabled the creation of entities
such as Apple Inc.s Apple Operations International, (incorporation in Ireland,
headquarters in California) which has no declared tax residency.
Shifting Profits via Transfer Pricing and Intercompany Transactions
Whereas deferring foreign profits enables multinationals to maintain the tax rates of the
territories in which they operate, transfer pricing strategies are designed to allocate
profit from high tax jurisdictions to subsidiaries in low tax jurisdictions, creating tax
efficiencies. Transfer pricing is a profit allocation method used to attribute a multinationals
earnings to subsidiaries in the countries where it does business. This system establishes the
cost of tangible goods, intangible property (IP, note that intellectual property is a sub
category of intangible property) and services sold between controlled or related legal
entities within an enterprise. Transfer pricing must be based on arms length agreements
under which transactions are predicated on what a seller would charge an independent
customer or what a buyer would pay an independent supplier. However these standards
often prove hard to apply and enforce, particularly when applied to intangible property.
Tax Efficiencies. Engaging in aggressive transfer pricing, or shifting profits from high
tax jurisdictions such as the U.S. to lower tax jurisdictions, such as the Switzerland or the
U.K., reduces the amount of taxes paid within the U.S. (as long as profits are retained
outside the U.S.), increasing profits consolidated in the domestic companys P&L
(though again, cash is stranded offshore).
Transfer Pricing Takes Time. Transfer pricing strategies are typically executed over a
multi-year period. Specifically, transfer pricing is most effective when IP is developed
offshore prior to commercialization (note that the IP resides offshore but the
development work may be contracted to the U.S. - as such, transferring IP offshore does
not require that operations are transferred offshore, this is an important distinction that
extends to much of transfer pricing). Many of the transfer pricing benefits accruing to
technology companies such as Apple, Microsoft and Google are the result of transfer
pricing structures set up more than a decade ago. It is also possible for a U.S.
corporation to transfer IP for already commercialized products to foreign subsidiaries,
but for established products with intrinsic value, the cost of sale can be prohibitive and
there are restrictions on the amount of profit that can be transferred.
Transfer Pricing Methods. Transfer pricing comes in many forms. The most common
methods include:
Intercompany sale of tangible goods. In this method, a domestic subsidiary sells its
goods at a transfer price to a foreign subsidiary which resells the goods to third
parties.
Transfer of intangible property and licensing. For example, a US-based subsidiary
can license out its technology IP (e.g. patents, processes, copyrights) or marketing IP
(e.g. trademarks, brand names, customer lists) to a foreign-based subsidiary, which
in turn uses the IP to produce products/services sold to a third party.
Cost sharing arrangement (CSA). Under this arrangement, a US parent and a
related subsidiary agree to share costs of developing jointly owned IP in proportion
18 June 2014 47
to their expected benefits from the resulting intangible. Examples of such intangibles
include licensing rights for product and production know-how. Utilizing this method,
the foreign subsidiary pays a percentage of initial costs rather than paying a
percentage of future fair value of the intangibles. Such arrangements are often
utilized by pharmaceutical manufacturers.
Providing intercompany services. Under this type of transaction, the US entity
provides services (e.g. IT, R&D, and legal services) to a foreign subsidiary in
exchange for at-cost or cost-plus fees.
Intercompany financing. Financing-related transfer pricing activities include
intercompany loans, guarantee fees, and leasing of tangible assets. For example, an
intercompany debt transaction, may allow an offshore based financing subsidiary to
make a loan to a US-based company, with interest and principle repaid over time.
For guarantee fees, the US parent can guarantee the debts of a foreign subsidiary,
providing economic benefits in exchange for a guarantee fee payment.
Regulation. Section 482 of the U.S. tax code gives the IRS power to investigate
transactions between related entities to ensure that profits transferred between arms
length entities do not transfer outsized profit or expense offshore, leading to diminished
U.S. tax income. While this is a powerful tool, the IRSs track record challenging transfer
pricing transactions is mixed, particularly with respect to intangible assets where it is
difficult to assess the value of transferred assets.

18 June 2014 48
ANALYST(S) CERTIFICATION(S):
We, Meredith Adler, CFA and Eric Percher, hereby certify (1) that the views expressed in this research report accurately reflect our personal views
about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly
or indirectly related to the specific recommendations or views expressed in this research report.
The POINT Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firms POINT quantitative model and Barclays
hereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm's
compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

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Primary Stocks (Ticker, Date, Price)
Walgreen Co. (WAG, 16-Jun-2014, USD 73.29), Overweight/Neutral, C/J

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18 June 2014 49
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Below is the list of companies that constitute the "industry coverage universe":
U.S. Food & Drug Retailing
Big Lots Inc. (BIG) Costco Wholesale Corp. (COST) CVS Caremark Corp. (CVS)
Dollar General Corp. (DG) Dollar Tree Stores (DLTR) Family Dollar (FDO)
Five Below, Inc. (FIVE) GNC Holdings Inc. (GNC) Herbalife Ltd. (HLF)
Kroger Co. (KR) Safeway Inc. (SWY) Sally Beauty Holdings, Inc. (SBH)
SuperValu Inc. (SVU) SYSCO Corp. (SYY) United Natural Foods, Inc. (UNFI)
Vitamin Shoppe Inc. (VSI) Wal-Mart Stores (WMT) Walgreen Co. (WAG)
Weight Watchers International Inc. (WTW) Whole Foods Market (WFM)

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A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow.
A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability.
18 June 2014 50
A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions.
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18 June 2014 51
Walgreen Co. (WAG)
Stock Rating Industry View
USD 73.29 (16-Jun-2014) OVERWEIGHT NEUTRAL
Rating and Price Target Chart - USD (as of 16-Jun-2014) Currency=USD
Date Closing Price Rating Adjusted Price Target
23-Dec-2013 57.54 56.00
02-Oct-2013 56.53 52.00
26-Jun-2013 45.01 42.00
20-Jul-2012 34.60 Equal Weight 39.00
23-Aug-2011 34.68 Underweight 29.00
Source: Thomson Reuters, Barclays Research
Historical stock prices and price targets may have been adjusted for
stock splits and dividends.
Source: IDC, Barclays Research
Link to Barclays Live for interactive charting

C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in equity securities issued by Walgreen Co. or one of its
affiliates.
J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of Walgreen Co..
Valuation Methodology: Our $92 price target is based on 15x our adjusted cash FY18 EPS forecast of $7.79, discounted back to FY15 with cost of
equity of 9.2%.
Risks which May Impede the Achievement of the Barclays Research Price Target: We see several risks to Walgreen over the next few years.
First, management may decide not to take value-enhancing steps that investors are hoping for, or it could run into difficulty executing its
turnaround initiatives and customers could be unhappy with the changes, pressuring sales and operating margins. Second, the competitive and
regulatory climates could deteriorate. Third, third-party reimbursement rates -- especially Medicaid -- could continue to drop significantly.

Closing Price Target Price Rating Change
Jul- 2011 Jan- 2012 Jul- 2012 Jan- 2013 Jul- 2013 Jan- 2014 Jul- 2014
25
30
35
40
45
50
55
60
65
70
75
80

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