An arm of the Change to Win Federation of labor unions that advises union-sponsored pension funds is pressuring Walgreen to postpone its planned acquisition of European pharmacy giant Alliance Boots.

WalgreenCtW Investment Group sent a letter on Tuesday to Walgreen chairman James Skinner, insisting that the deal should not be finalized until a thorough examination is made of claims made in former CFO Wade Miquelon’s defamation lawsuit against the company.

The lawsuit, filed on Oct. 16, was in response to allegedly false and defamatory statements about Miquelon, including that he was responsible for a $1.1 billion forecasting error. Miquelon says Walgreen CEO Gregory Wasson and Alliance Boots chairman Stefano Pessina made the statements during meetings with investors between Aug. 5 and Aug. 8. Miquelon had resigned his CFO post on Aug. 4, agreed to stay on until December as an adviser, and was granted severance pay of almost $4.7 million.

Miquelon’s lawsuit says an internal memo prepared by a Walgreen investor relations director reported on the disparaging remarks. Then, on Aug. 19, The Wall Street Journal published an article containing allegedly false and defamatory statements about Miquelon that were attributed to unnamed investors. The investors cited Walgreen directors and “people familiar” with the situation as the source of their information. The article reported that Walgreen directors told the investors that they had no idea the forecasting change was coming.

The lawsuit vehemently disputes that, saying, “Wasson and Pessina had worked hand in hand with Miquelon on the FY 2016 EBIT forecast for many months and were fully aware of the market-related challenges to achieving the goal.” It further says that six weeks before releasing a revised forecast for earnings before interest and taxes, “the company, at Miquelon’s insistence and despite pressure from Wasson to delay, announced that it had to withdraw its previously announced FY 2016 EBIT goal because it was no longer reasonable. Any notion that Wasson or Pessina could possibly have been ‘shocked’ by a ‘sudden’ decrease in the forecast is entirely false.”

There are numerous other claims in the decidedly juicy lawsuit, such as that Wasson pressured Miquelon to forecast what the CFO thought was an entirely unreachable $6 earnings-per-share figure for fiscal year 2016. According to the court filing, on June 11 Wasson sent a text message to Miquelon that stated, “Let’s push for a 6 somehow.” Miquelon says he responded, “I don’t think there is any way we could ensure that,” to which he says Wasson replied, “No choice. Need a 6. We’ll find a way.”

Many internal disputes were related to the Alliance Boots deal, a planned two-step acquisition in which Walgreen paid $6.7 billion in cash and stock in June 2012 for a 45% equity ownership in the European company. That transaction resulted in Pessina becoming the largest shareholder in Walgreen, owning 8% of the company. The second half of the deal, in which Walgreen would buy the rest of the company, was scheduled to close in February 2015.

Walgreen was considering doing a tax inversion in conjunction with the acquisition in which it would redomicile in Europe. Miquelon says he concluded that the inversion wasn’t in the best interests of shareholders, which put him at odds with Pessina, Wasson and hedge-fund investors in Walgreen. Miquelon’s lawsuit alleges that in a conference call on June 24, one activist hedge-fund investor told him that if he did not start “doing his job,” two other activist investors would “stop at nothing to get you out of the way, including getting personal dirt on you and embarrassing you publicly.”

Miquelon also claims that he was offered a job as the strategic overseer of the combined company and would be considered first in line to be Wasson’s successor as CEO. He says he decided to turn down the job and resign from the company to seek new opportunities, which he says were plentiful at the time.

Walgreen on Monday filed a court motion stating that Miquelon was in fact responsible for the forecasting error and that his departure from the company wasn’t wholly voluntary.

Miquelon’s lawsuit also claims that Wasson and Pessina, both of whom are Walgreen directors, met with hedge-fund investors on their own without the involvement of the rest of the board.

That’s among several reasons why CtW is calling for the second step of the Alliance Boots acquisition to be postponed and for Walgreen to form an independent board committee to investigate Miquelon’s claims.

“We have concerns about the culture of accountability at Walgreen as its morphing into this new, larger company,” Michael Pryce-Jones, a CtW analyst, tells CFO. “What’s missing seems to be clear leadership from the board. What’s recounted in Miquelon’s lawsuit suggests that the board wasn’t really very visible from February through May in considering whether an aggressive advocacy of the tax inversion by hedge funds was in the best interests of shareholders. You’d think the board would have been involved with sanctioning further discussions with these hedge funds.” Walgreen subsequently announced that it would not do the inversion.

Pryce-Jones further notes that the merger proxy for the deal contains “almost no disclosure about how this deal came about and about some oddities in the way the deal was negotiated. If you view this as one transaction, Pessina was able to get an 8% stake in Walgreen up front, and then he can vote that in favor of Walgreen acquiring the rest of his company. That’s not illegal, but it doesn’t suggest a board that’s very good at negotiating a deal that protects its shareholders. The shareholders are really walking blind into an incredibly transformative and expensive deal.”

The Wall Street Journal reported on Tuesday that a Walgreen spokesman said, “We are well aware of CtW’s continuing objection to our strategic partnership with Alliance Boots, which is nothing new,” and that the company still expects to complete the deal next year.

About Miquelon’s claim that Wasson pressured him to make a misleading earnings-per-share forecast, Pryce-Jones says, “If there’s any truth to that, it suggests a corporate culture of aggressive estimation. And when you do an acquisition, especially when you’re under pressure from hedge funds to do share buybacks, as is the case here, there’s every incentive to try to oversell the [Alliance Boots] deal. The board really needs to weigh in and ensure that isn’t the case.”

CtW also takes issue with Walgreen’s intention to do the deal without re-examining whether it still makes sense if not accompanied by a tax inversion. “They’re just going along as if it’s a done deal,” Pryce-Jones says. “They should re-evaluate it from scratch.”

And CtW wants to know why it took so long for Walgreen to reveal its revised EBIT guidance for fiscal year 2016. “These weren’t any old estimates,” Pryce-Jones says. “These were estimates that partly sold investors on the Alliance Boots deal.”

He adds that he doesn’t understand why Miquelon got severance pay. There hasn’t been any change in control of the company, and there won’t be when the acquisition is completed, he notes.

From an investor’s point of view, Pryce-Jones says, at a minimum the company’s senior leadership appears to be somewhat dysfunctional. “At worst, this could be a company that is suffering from some sort of deterioration,” he says.

Photo: Theopolisme, CC BY-SA 3.0

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