Walgreens' (WAG) Rosenstein Appointment Positive, ISI Group Says; Express Scripts (ESRX) Merger Unlikely

ISI Group analyst Ross Muken weighed in on Walgreens (NYSE: WAG) after the company appointed JANA Partners' Barry Rosenstein to the Board and also discussed speculation around the company's relationship with Express Scripts (NASDAQ: ESRX).

Muken said the Rosenstein appointment "should serve to answer any doubters with respect to the stance of key shareholders who had long envisioned the company as a persistent underperformer in need of a complete transformation."

The analyst also notes that one of the most discussed topics last week among investors was an expanded relationship between Express Scripts & WAG or even the possibility of an acquisition / merger-of-equals. "We struggle on the latter concept given the magnitude of work that would have to be done to solidify the earnings power / value of the WAG franchise, making a tie-up decidedly challenging. Furthermore, we rarely see a merger born out of weakness, as both WAG and ESRX (going through one of its worst selling seasons in years) continue to struggle in their respective markets and the formation of a Maintenance Choice-like program would take years to gain momentum, as well as would likely inflict more challenges on each of their respective businesses (investors will remember the early years of the CVS/Caremark merger as far less than smooth sailing vs. today's immense success)." He added, "With respect to an expanded relationship outside of a merger (à la their failed attempt via Smart90), we see the main challenge being economic / ownership structure. JVs are certainly challenging for all involved (WAG already has a complicated relationship with its distribution partner AmerisourceBergen) and given the C-suite personalities and respective views on each other's business models (battle of mail vs. retail), we are unsure how one could be effectively executed upon (without clearly shared economics the program is unlikely to garner much momentum when a perfectly suitable substitute already exists from CVS). Ultimately, a more formalized relationship between ESRX and WAG may certainly make quite a bit of sense over the long-term, but we do not foresee a clear path to such arrangement given the current operating environment for both companies as well as the aforementioned C-suite challenges."

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