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Walgreens bets big on Europe

June 19, 2012: 1:00 PM ET

Stefano Pessina, executive chairman of Alliance Boots, accepts a $6.7 billion investment from Walgreens chief executive Gregory Wasson.

Walgreen is placing a big bet on Europe, which could prove to be a risky move, given the ongoing debt crisis rattling the continent.

The Deerfield, Ill.-based drugstore chain is taking a 45% stake in Swiss-based Alliance Boots, an international pharmacy company based in Europe.

Alliance Boots, with headquarters in Switzerland, has operations across Europe, including a strong presence in the United Kingdom. It also has joint ventures in Russia and China.

Shares of Walgreen (WAG) fell 6% to $30 in midday trading.

While the acquisition is a good long-term move, it raises  some short-term concerns, said Ann Hynes, an analyst at Mizuho Securities. In a note to clients, Hynes pointed to "the increased risk profile associated with this transaction given the acquisition is a major strategy change coupled with the economic worries of Europe."

Stefano Pessina, executive chairman of Alliance Boots, said the companies are a natural fit, although he acknowledged that it will take time to integrate. Pessina did not mention the financial meltdown currently engulfing his side of the Atlantic.

Walgreen has been struggling domestically. Same store sales have declined and the company has lost market share since it ended a contract with Express Scripts (ESRX), the largest pharmaceutical benefits manager in the United States, said Matthew Coffina, an analyst at Morningstar.

Then, there's the debt.

Walgreen said it will finance most of the investment with new borrowings. The company has secured a $3.5 billion bridge facility from Goldman Sachs (GS) and Bank of America (BAC).

Meanwhile, credit rating firm Egan-Jones downgraded Walgreen to A from A+, citing the additional debt.

"I don't know that its the best time to be integrating a huge company in Europe with a lot of debt," said Coffina. "Investors would like to see them resolve the situation here in the United States first."

Rival drug store chain Rite Aid (RAD) purchased Brooks and Eckerd in 2007, right before consumer spending at drug stores dropped significantly. Rite Aid shares plunged after the deal and have yet to recover. On Tuesday, Rite Aid's stock was down 4.5%.

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