Walgreens Faces Uphill Battle to Snag AmerisourceBergen

Vishnu Lekraj: On Monday it was reported that Walgreens has approached AmerisourceBergen about a merger. While this may be a surprise to some analysts, we've expected this for a while, as Walgreens has purchased about 26% of AmerisourceBergen equity and has integrated a good deal of its operations with the drug distributor.

However, we are uncertain that this deal makes a lot sense from the point of view of AmerisourceBergen. We've assigned the company a wide moat and believe it has deep competitive advantages moving forward. Walgreens, on the other hand, we believe has a no-moat business, and it will struggle over the long term. Thus, we believe a premium above $106 fair value estimate for AmerisourceBergen will be needed in order for this deal to be consummated.

Additionally, we believe this deal is going to be very complex and very hard to pull through as far as operations integrations go. Thus, we believe it will be very hard for Walgreens to convince AmerisourceBergen's management team and their shareholders to go ahead with this deal.