Walgreens 2014 Annual Report Download - page 48

On August 2, 2012, we acquired a 45% equity interest in Alliance Boots GmbH, a leading international
pharmacy-led health and beauty group, which we account for using the equity method of accounting. As part of
the initial 45% investment in Alliance Boots, we also acquired the right, but not the obligation, to elect to acquire
the remaining 55% interest in Alliance Boots (the second step transaction), at any time during the period
beginning February 2, 2015 and ending on August 2, 2015, in exchange for £3.133 billion in cash, payable in
British pounds sterling, and 144,333,468 shares of Walgreens common stock, subject to certain specified
potential adjustments (the call option). On August 5, 2014, the Purchase and Option Agreement was amended to
permit the exercise of the call option beginning on that date, and we, through an indirectly wholly-owned
subsidiary to which we previously assigned our rights to the call option, exercised the call option on August 5,
2014. Additional information regarding our investment in Alliance Boots and the pending second step transaction
is available in our and Walgreens Boots Alliance’s filings with the SEC, including our Form 8-K filed on
May 15, 2014 that includes Alliance Boots’ audited consolidated financial statements (prepared in accordance
with International Financial Reporting Standards as issued by the International Accounting Standards Board
(IFRS) and audited in accordance with U.S. GAAS), comprised of the statements of financial position at
March 31, 2014 and 2013 of Alliance Boots and its subsidiaries (the Group) and the related Group income
statements, Group statements of comprehensive income, Group statements of changes in equity and Group
statements of cash flows for each of the years in the three-year period ended March 31, 2014, and our Form 8-K
filed on September 16, 2014 that includes certain unaudited pro forma consolidated financial information related
to the pending Transactions.
In addition, we plan to complete, immediately prior to the completion of the second step transaction, a
reorganization of Walgreens into a holding company structure, under which Walgreens would become a wholly-
owned subsidiary of a new Delaware corporation named “Walgreens Boots Alliance, Inc.” and Walgreen Co.
shareholders immediately prior to the Reorganization would become shareholders of Walgreens Boots Alliance,
with shares of Walgreen Co. common stock being converted automatically into shares of Walgreens Boots
Alliance common stock on a one-for-one basis. The Reorganization is conditioned upon the second step
transaction being completed immediately following the completion of the Reorganization. The second step
transaction is not conditioned on the completion of the Reorganization. Closing of the Transactions is subject to
shareholder and various regulatory approvals and is expected to occur in the first quarter of calendar 2015.
Walgreens equity earnings, initial investment and the call option exclude the Alliance Boots minority interest in
Galenica Ltd. (Galenica). The Alliance Boots investment in Galenica was distributed to the Alliance Boots
shareholders other than Walgreens during May 2013, which had no impact on the Company. We account for our
45% investment in Alliance Boots using the equity method of accounting. Investments accounted for under the
equity method are recorded initially at cost and subsequently adjusted for our share of the net income or loss and
cash contributions and distributions to or from these entities. Net income reported by Alliance Boots is translated
from British pounds Sterling at the average rate for the period. See Note 5 to our Consolidated Financial Statements
in Part II, Item 8 of this Form 10-K for additional information regarding our equity method investments. We utilize
a three-month lag in reporting equity income from our investment in Alliance Boots, reported as equity earnings in
Alliance Boots on the Consolidated Statements of Earnings. The investment is recorded as Equity investment in
Alliance Boots in the Consolidated Balance Sheets. Upon closing of the second step transaction, Alliance Boots will
be included in our consolidated financial statements. The timing of the closing of the second step transaction and the
length of the reporting lag, if any, we use to report the results of Alliance Boots after the closing of the second step
transaction is expected to impact our reported financial results in fiscal 2015. An earlier closing and/or shorter
reporting lag would increase, and a later closing would decrease, the extent to which fully consolidated Alliance
Boots results would be reflected in our consolidated fiscal 2015 financial statements.
Upon the amendment and immediate exercise of the call option to acquire the remaining 55% ownership of
Alliance Boots, the Company was required to compare the fair value of the amended option with the book value
of the original option with a non-cash gain or loss recognized for the difference. The fair value of the amended
option was estimated to be zero based on its valuation as a financial instrument without regard for its strategic
value. The reduction in value was primarily due to the shorter duration of the amended option and the
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