Walgreens 2015 Annual Report Download - page 89

As a result of the Company acquiring the remaining 55% interest in Alliance Boots, the Company’s previously
held 45% interest was remeasured to fair value, resulting in a gain of $563 million. This gain has been
recognized as Gain on previously held equity interest in the Consolidated Statements of Earnings. This gain is
preliminary and may be subject to change as the Company finalizes purchase accounting.
The fair value of the previously held equity interest of $8.1 billion in Alliance Boots was determined using the
income approach methodology. The fair value for trade names and trademarks was determined using the relief
from royalty method of the income approach; pharmacy licenses and customer relationships were determined
using the excess earnings method of the income approach; and loyalty card holders were determined using the
incremental cash flow method which is a form of the income approach. Personal property fair values were
determined primarily using the indirect cost approach, while real property fair values were determined using the
income, market and/or cost approach. The fair value measurements of the previously held equity interest and
intangible assets are based on significant inputs not observable in the market, and thus represent Level 3
measurements. The fair value estimates for the previously held equity interest and intangible assets are based on
(a) projected discounted cash flows, (b) historical and projected financial information, (c) synergies including
cost savings, and (d) attrition rates, as relevant, that market participants would consider when estimating fair
values.
The preliminary identified definite and indefinite lived intangible assets were as follows:
Definite-Lived Intangible Assets
Weighted-Average Useful
Life (in years) Amount (in millions)
Customer relationships 12 $1,311
Loyalty card holders 12 742
Trade names and trademarks 7 399
Favorable lease interests 8 93
Total $2,545
Indefinite-Lived Intangible Assets Amount (in millions)
Trade names and trademarks $6,657
Pharmacy licenses 2,489
Total $9,146
The preliminary goodwill of $14.8 billion arising from the Second Step Transaction primarily reflects the
expected purchasing synergies, operating efficiencies by benchmarking performance and applying best practices
across the combined company, consolidation of operations, reductions in selling, general and administrative
expenses and combining workforces.
Following the completion of the Second Step Transaction, the Company has realigned its operations into three
reportable segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The
Company determined that the preliminary goodwill should be allocated across all segments recognizing that each
segment will benefit from the expected synergies.
The preliminary goodwill allocated to the Retail Pharmacy USA segment of $7.3 billion comprises $3.5 billion
of synergy benefits allocable to the segment on a source of procurement benefit basis and $3.8 billion determined
on a “with-and-without” basis. The source of procurement benefit basis allocates the synergy benefits to the
segment whose purchase gave rise to the benefit. The “with-and-without” basis computes the difference between
the fair value of the pre-existing business before the combination and its fair value after the combination, and
since the pre-existing Walgreens business is now within the Retail Pharmacy USA segment, all of this difference
is allocated to this segment. The “with-and-without” computation recognized that if the Second Step Transaction
did not happen, then this was likely to negatively impact the existing Walgreens business, which already had a
45% interest in Alliance Boots, as the expected purchasing synergies and other benefits resulting from a full
combination would not be fully realized.
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