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Agenda

Date: November 21, 2013 Jun Yuan (Jason) Chan Hisham Haider Dewan Zige (Z) He Charalampos ( Haris ) Ntantanis. Agenda. Holding Information Company overview Macro-economic overview Industry analysis Equity market performance Financial analysis and projections Valuation

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Agenda

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  1. Date: November 21, 2013Jun Yuan (Jason) ChanHisham Haider DewanZige (Z) HeCharalampos (Haris) Ntantanis

  2. Agenda • Holding Information • Company overview • Macro-economic overview • Industry analysis • Equity market performance • Financial analysisand projections • Valuation • Recommendation

  3. Current Holdings Number of shares: 500 purchased Oct 05, 1999 at $25/share Total Purchase Price = $12,500 Current Market Value ($59.40 per share*) = $29,700 Holding period return = 137.60% Annually compounded return = 6.377% Allocation of portfolio = 14.75% Source: Yahoo Finance; *$59.40 per share as of Nov 20, 2013

  4. Introduction to Walgreen (NYSE:WAG) • Walgreen Co. operates the largest drugstore chain in the U.S. with net sales of $72.2 bn. in FY 2013 • Provides customers access to pharmacy, consumer goods and services, and health and wellness services • Service through drugstores, mail, phone and online • August 2, 2012, WAG held a 45% investment interest in Alliance Boots GmbH, Europe based pharmacy-led health and beauty group Source: Walgreen Co. 2013 10K filing Item 1. Business

  5. Business Segments Source: Walgreen Co. 2013 10K filing Item 1. Business

  6. Revenue Breakdown by Segment Source: Bloomberg terminal Walgreen Co. revenue breakdown by segment

  7. Distribution Network Source: Walgreen Co. 2013 10K filing Item 1. Business

  8. Distribution Network • Mobile • Alliance Boots expands into Europe • New store through M&A • Online eCommerece • Mail order

  9. Annual Revenue Source: Walgreen Co. 10K filing from 2007 to 2013 Statement of Earnings

  10. Annual Net Income Source: Walgreen Co. 10K filing from 2007 to 2013 Statement of Earnings

  11. Same Store Sales Growth Source: Susquehanna Financial Group, LLLP (SFG) Research Walgreen Company Update October 3, 2013, page 3

  12. Mergers, Acquisition and Partnerships • AmerisourceBergen: 10 year pharmaceutical distribution agreement to source branded and generic drugs • Acquisition of USA Drug, Super D Drug, May's Drug, Med-X, Drug Warehouse • Acquisition of Kerr Drug (76 retail drugstores in South Carolina) Source: Walgreen Co. 2013 10K filing Item 1. Business - Business Development

  13. Equity Stake of Alliance Boots • WAG has 45% investment in Alliance Boots at $6,690.23 Mil giving WAG access to EU markets

  14. About Alliance Boots Source: Alliance Boots Annual Report 2012-13 page 1-2

  15. Option to Buy Alliance Boots • WAG has a call option to acquire remaining 55% equity interest during the 6 month period beginning February 2, 2015 • Will be purchased with cash of £3.133 billion ($5.0 Bil. as of August 31, 2012) and stocks of WAG1 • Additional 55% stake in AB estimated to cost $8.177 Bil.2 • Alliance Boots had approximately $10.1 billion of outstanding debt, including short-term borrowing2 • Net realized synergy of $154m was greater than expected range of $130m to $150m was greater than expected in 20134 Source: 1. Capital IQ; 2. Author’s estimation; 3. Walgreen Co. 2013 10K filing Item 1A. Risk Factors and based on exchange rates as of March 31, 2013 (Approximately £6.7 billion); 4. http://investor.walgreens.com/releasedetail.cfm?ReleaseID=793976

  16. Dispute Resolution with Express Scripts • WAG derives significant portion of sales from prescription drug sales reimbursed through prescription drug plans by pharmacy benefit management (PBM) companies • Lost network of Express Scripts, Inc. for more than eight months in 2012, which led most patients in plans transition to a new pharmacy • Even after resuming PBM relationship all customers may not come back Source: Walgreen Co. 2013 10K filing Item 1A. Risk Factors

  17. Equity Performance Source: Google Finance

  18. Technical Analysis Source: http://finance.yahoo.com/q/ta?s=WAG&t=1y&l=on&z=l&q=l&p=m50%2Cm200&a=&c=

  19. Macro-economic Overview • Increasing number of physician visits • Rising cost of pharmaceutical products in U.S. • Total healthcare expenditure $5 trillion globally • Aging population in U.S., U.K., and E.U. • Recessionary or low growth environment in EU: UK GDP grew 0.8% between July and September Source: 1. IBISWorld Industry Report 33451b Medical Device Manufacturing in the US October 2013, page 4. 2. Source: OECD. Health Data 2013. Frequently Requested Data. http://www.oecd.org/els/health-systems/oecdhealthdata2013-frequentlyrequesteddata.htm 3. http://www.bbc.co.uk/news/business-24668687

  20. Macro-economic Outlook

  21. Drug Retail Industry Source: IBISWorld Industry Report 44611 Pharmacies & Drug Stores in the US, Page 4

  22. Industry Growth Drivers • Disposable income rising • Aging population (13.7% of the U.S. population is over 65) • Number of people covered by private health insurance (49.1 Mil. or 16% of the U.S. population uninsured) • Number of physician visits expected to increase

  23. Patient Protection & Affordable Care Act: Impact on WAG • Removed employees from company healthcare plan • Subsidize roughly 160,000 employees to purchase insurance • Aside from rising health-care costs, the company cited compliance-related expenses Source: http://online.wsj.com/news/articles/SB10001424127887323527004579081563998551366

  24. Risks • Increased competition from other large chain retail pharmacies • Reimbursement levels under government budget pressures, health-care reform, and PBM consolidation • The loss of large PBM customer and failure in recapturing scripts that were lost due to the Express Scripts dispute • Performance from Alliance Boots comes in below expectation and prior synergy targets are not realized • Exposure to Europe's troubled economies • Increased financial leverage

  25. Porter’s Five Forces for Walgreen

  26. Management Outlook and Performance • Bad handling of PBM Express Scripts (ESRX) shows weakness in handling difficult negotiation • Management optimistic about Alliance Boots acquisition • Expects to acquire smaller local chains in U.S. • Plans to open more in-store clinics Source: Walgreen Company WAG Q4 2013 Earnings Call Transcript http://www.morningstar.com/earnings/earnings-call-transcript.aspx?t=WAG

  27. Company Life Cycle Source: http://businessplanning.org/files/industry-lifecycle.png

  28. Walgreen SWOT Analysis

  29. Financial Analysis Ratio Analysis, DuPont Analysis, Lease

  30. Ratio Analysis

  31. Ratio Analysis

  32. DuPont

  33. Walgreens Leases • Walgreens owns approximately 20% of its operating locations; the remaining locations are leased premises.   • Initial terms are typically 20 to 25 years.

  34. Valuation DCF, Relative valuation, Benjamin Graham formula

  35. Cost of capital

  36. Free Cash Flow to Firm (Option Not Exercised)

  37. Free Cash Flow to Firm (Option Exercised)

  38. DCF Valuation Option Exercised Option Not Exercised

  39. Comparable Companies

  40. Relative Valuation *Using subjective weights for companies

  41. Benjamin Graham's Formula

  42. Key decision driver Upside • Possibility of synergy with Alliance Boots • Strong same store sales growth • Improvements in margins due to NYSE:ABC deal Downside • Increased leverage • Inadequate synergy with Alliance Boots • Increased power of managed care providers influencing margins

  43. Valuation Results

  44. Recommendation 200 Shares @ Market Price Expected gain $6,880 if sold at $59.40 per share SELL

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