Get unlimited digital access to $0.99 for 4 weeks.

Walgreen feared IRS scrutiny if inversion OK'd

Why Walgreen didn't invert its HQ overseas
Three letters help explain why Walgreen kept its HQ in the USA: IRS
Walgreen will complete its deal for Alliance Boots but not move overseas in the process. Here's why.

A seeming parade of U.S. companies has been marching across the Atlantic, reincorporating in Europe to take advantage of substantial corporate tax breaks.

Despite a growing drumbeat of criticism from activists and politicians, threats from U.S. officials to change the tax code, and other challenges, firms have pressed forward with a growing number of so-called inversions, concluding that the substantial tax savings outweigh the risks of decamping.

For Deerfield-based Walgreen, the risks proved too high.

Fearful of an IRS challenge, a change to U.S. tax laws, blowback from politicians and consumers, and the potential for untangling a just-completed purchase two years in the making, the drugstore chain announced the decision Wednesday to keep its headquarters in the Chicago area.

For Walgreen, under pressure from major investors to reincorporate in the United Kingdom or Switzerland after completing its $15.3 billion purchase of European counterpart Alliance Boots, moving overseas wasn't in its best long-term interest.

While an inversion could have potentially added hundreds of millions of dollars annually to Walgreen's bottom line, the move also could have backfired, perhaps putting the company "in a significantly worse position than if we had not inverted at all," Walgreen Chief Executive Greg Wasson told analysts.

Walgreen's decision to acquire Boots in two steps, starting by taking a 45 percent stake in 2012, complicated the prospect of inverting.

In order to move its headquarters overseas and shield its profits from a 35 percent U.S. corporate tax rate, Walgreen would have had to scrap its 2012 agreement and rework it entirely, Wasson said.

Changing the terms of that agreement could have brought additional scrutiny from the IRS, which could have challenged the deal. During a conference call, Wasson said the Walgreen board wasn't able to "ensure that the transaction could withstand almost certain, intense, protracted IRS scrutiny."

Disputes with the IRS could take up to a decade to adjudicate, Wasson said, which could "significantly complicate and impede everyday tax and business planning, possible dual taxation during intervening years and payment of back taxes with interest and significant penalties."

Public backlash to Walgreen weighing reincorporating overseas played a role in its decision to remain in the U.S., the company said.

Several U.S. companies, including North Chicago-based AbbVie, Deerfield-based Horizon Pharma, as well as Medtronic, Chiquita Brands and Mylan, orchestrated acquisitions that allow shifting their headquarters across the Atlantic Ocean to lower their corporate tax rate.

But for Walgreen, such an undertaking would have been "much more complex" and "far different" than other corporate inversions announced this year, Wasson said, in part because of its status as "an iconic American consumer retail company with a major portion of its revenues derived from government-funded reimbursement programs."

The company, with 8,200 retail stores throughout the United States, faced, by far, the most scrutiny. If Walgreen effectively renounced its U.S. citizenship, potential repercussions from American consumers and possibly the government were worrisome to some shareholders.

Vishnu Lekraj, an analyst with Morningstar, said the "political and potential consumer backlash would have been significant," particularly because of Walgreen's "deep brand roots as 'America's Pharmacy.'"

Wasson also cited "the potential consumer backlash and political ramifications" of the move as being part of the company's decision not to carry out an inversion.

Since Walgreen acknowledged in June that it was considering moving its tax domicile overseas, lawmakers including Sen. Dick Durbin of Illinois, the No. 2 Democrat in the U.S. Senate, have upped their rhetoric on the issue.

Along with fellow Democratic Sens. Elizabeth Warren of Massachusetts and Jack Reed of Rhode Island, Durbin sent a letter urging President Barack Obama to consider taking executive action to halt inversions.

The president, who has called corporate inversions "wrong" and an "unpatriotic tax loophole," had called on Congress to act on legislation to halt the exodus.

Treasury Secretary Jacob Lew said this week that the administration was considering ways to stop the practice without congressional approval.

Saul Rudo, head of the tax planning practice at the Katten Muchin Rosenman law firm, said Walgreen's decision could slow the inversion momentum.

"It was a very public situation with Sen. Durbin and others trying to lobby Walgreens not to do an inversion," Rudo said. "I think companies and their executives will consider what kind of political pressure they might get."

Walgreen's decision not to go through with the inversion disappointed large investors. Shares fell 14.3 percent, to $59.21, on Wednesday after dropping 4.1 percent the day before.

The new U.S.-based holding company will have four divisions: Walgreen, which will continue to be based in Deerfield; Boots, which will maintain its headquarters in Nottingham, England; Pharmaceutical Wholesale and International Retail; and Global Brands.

Walgreen has yet to determine the location of the new corporate headquarters of the holding company, though Wasson said it will remain in the Chicago area.

Wasson is to become president and CEO of the new holding company, Walgreens Boots Alliance. Wasson's European counterpart, Stefano Pessina, will be executive vice chairman of the new company, in charge of strategy and mergers and acquisitions. He will report to Wasson.

Former McDonald's executive Jim Skinner, who is Walgreen's chairman, will keep that role for the combined company.

Out at Walgreen are former Chief Financial Officer Wade Miquelon, who was replaced Monday by Timothy McLevish, formerly of Kraft Foods Group; and Kermit Crawford, Walgreen's president of pharmacy, health and well-being, who will retire.

Wasson said he and Pessina, an Italian billionaire who will become the company's largest individual shareholder, worked together to craft the new combined executive team, which includes members from both companies.

"It's exciting as heck," Wasson told the Tribune. "I'm energized, excited. I've got a tremendous team on both sides that I feel confident with and about. I couldn't be more thrilled and privileged to have the opportunity to lead this new combined international group."

Under the structure of the deal, Walgreen will pay about $5.29 billion in cash and hand over 144.3 million shares of common stock, which was valued at $9.97 billion at the close of trading Tuesday.

Walgreens Boots Alliance will have 11,000 retail stores in 10 countries, along with 370 distribution centers that serve 180,000 pharmacies, doctors, health centers and hospitals in 20 countries.

Tribune reporter Ameet Sachdev contributed.

Twitter @peterfrost

Copyright © 2015, The Baltimore Sun
Related Content