With more than 7,800 stores worldwide, Walgreen Co. (NYSE: WAG) was the sixth-largest U.S. retailer, based on 2013 sales of nearly $72 billion and profit of $2.5 billion. Virtually all those sales and profits came in the United States. But the company’s pending buyout of Switzerland-based Alliance Boots chain stands to make Walgreen both bigger and more international.
Not only that, some investors say that the acquisition of Boots is the perfect opportunity for Walgreen to relocate offshore. If the company does make that move, Walgreen’s earnings per share could increase by as much as 75% as a result of more favorable Swiss tax laws. Unsurprisingly, some of the company’s largest shareholders are urging Walgreen to re-domicile: Goldman Sachs, Jana Partners, Corvex and Och-Ziff met with the company’s management in April to try to persuade the firm to make the move.
Last week a U.S. group called Americans for Tax Fairness published a report noting that if Walgreen relocated to Switzerland the company could avoid $4 billion in U.S. taxes over a five-year period. The activist group notes, for example, that Walgreen gets 25% of its income from U.S. taxpayers through government programs like Medicare and Medicaid.
The Obama administration has proposed new, stiffer rules for U.S. companies that would reduce the amount of income companies earn overseas that could be sheltered from U.S. taxation. The proposed change will almost certainly not make it through the Republican-controlled House of Representatives.
Walgreen’s management had rejected the April plea from its big investors, but the pressure to move will increase once the Boots acquisition is completed. The company cites “perceived political risks” as its main reason for remaining in the United States. Translation: Walgreen’s management believes it will suffer significant blowback from U.S. consumers given the current climate regarding offshore holdings by U.S. companies.
Management’s analysis is almost certainly correct, but the question investors will ask is, “So what? Maximizing profit for your shareholders is your only consideration.”
If the company does relocate offshore, it will join plenty of pharmaceutical, technology and other firms that have formed subsidiaries overseas in order to avoid high U.S. corporate taxes. The betting here is that sometime after the Boots deal is completed, say six months to a year, Walgreen will make the move. The longer management holds out, the greater chance it faces a shareholder revolt that it almost certainly could not win.