Date: November 21, 2013 Jun Yuan (Jason) Chan Hisham Haider Dewan Zige (Z) He Charalampos (Haris) Ntantanis 1

Agenda

 Holding Information  Company overview  Macro-economic overview  Industry analysis  Equity market performance  Financial analysis and projections  Valuation  Recommendation

2

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

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

Business Segments

Prescription and non-prescription drugs General merchandise

• Household items, convenience and fresh foods, personal care, beauty care, photofinishing, and candy Source: Walgreen Co. 2013 10K filing Item 1. Business

Revenue Breakdown by Segment

2013 2012

27% 10% 63%   Prescription Drugs     General Merchandise     Non-prescription Drugs 25% 12% 63%   Prescription Drugs     General Merchandise     Non-prescription Drugs

6

Source: Bloomberg terminal Walgreen Co. revenue breakdown by segment

Distribution Network

6.2 million daily visits to stores in 2013 Location Type Drugstores

Worksite Health and Wellness Centers Infusion and Respiratory Services Facilities Specialty Pharmacies Mail Service Facilities

Total 2011 7761

355 83 9 2

8210 2012 7930

366 76 11 2

8385

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

2013 8116

371 82 11 2

8582 7

Distribution Network

 Mobile  Alliance Boots expands into Europe  New store through M&A  Online eCommerece  Mail order

8

Annual Revenue

Revenue

 $75 000  $70 000  $65 000  $60 000  $55 000  $50 000 $53 762 $59 034 $63 335 $67 420  $45 000  $40 000 2007A 2008A 2009A Source: Walgreen Co. 10K filing from 2007 to 2013 Statement of Earnings 2010A $72 184 2011A $71 633 2012A $72 217 2013A

9

3 000,00 2 500,00 2 000,00 1 500,00 1 000,00 2 006,00

Annual Net Income

2 091,00 2 714,00 500,00 0,00 2009A 2010A Source: Walgreen Co. 10K filing from 2007 to 2013 Statement of Earnings 2011A 2 127,00 2012A 2 450,00 2013A

10

Same Store Sales Growth

Source: Susquehanna Financial Group, LLLP (SFG) Research Walgreen Company Update October 3, 2013, page 3

11

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)

12

Source: Walgreen Co. 2013 10K filing Item 1. Business - Business Development

Equity Stake of Alliance Boots

 WAG has 45% investment in Alliance Boots at $6,690.23 Mil giving WAG access to EU markets

13

About Alliance Boots

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

14

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 WAG 1  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 borrowing 2  Net realized synergy of $154m was greater than expected range of $130m to $150m was greater than expected in 2013 4 as of March 31, 2013 (Approximately £6.7 billion); 4.  http://investor.walgreens.com/releasedetail.cfm?ReleaseID=793976

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

16

Source: Walgreen Co. 2013 10K filing Item 1A. Risk Factors

Source: Google Finance

Equity Performance

17

Technical Analysis

Source:

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

18

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-

19

frequentlyrequesteddata.htm

3. http://www.bbc.co.uk/news/business-24668687

Macro-economic Outlook

20

Drug Retail Industry

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

21

Industry Growth Drivers

1.

2.

3.

4.

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

22

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

23

Source: http://online.wsj.com/news/articles/SB10001424127887323527004579081563998551366

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

Porter’s Five Forces for Walgreen

Threat of new entrant:

High

Bargaining power of buyer:

High

Competitive Rivalry:

High

Threat of substitute product:

Medium

Bargaining power of supplier:

Medium 25

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

26

Company Life Cycle

Source: http://businessplanning.org/files/industry-lifecycle.png

27

Strengths

Walgreen SWOT Analysis

• Strong brand awareness • Distribution network • Diversified retail channels

Weaknesses

• High operating leverage (lease) • Exposure to weak EU economy

Opportunities Threats

• Strategic acquisitions and expansions • Growth of online retailing • Rising healthcare expenditure • Latent demand for beauty products • Global economic slowdown • Stringent government regulations • Highly competitive industry • Lack of synergy after acquisitions

28

Financial Analysis

Ratio Analysis, DuPont Analysis, Lease

29

Liquidity Ratios Current Ratio Quick Ratio Cash Ratio 2009A

1.78

0.78

0.17

Solvency Ratios Debt/Assets Debt/Equity Interest Coverage 2009A

0.09

0.16

39.12

Activity Ratios A/R Turnover Fixed Asset Turnover Total Asset Turnover 2009A

25.37 5.86

2.52

Ratio Analysis

2010A

1.60

0.61

0.16

2011A

1.52

0.53

0.13

2010A

0.09

0.17

40.68

2010A

27.52 6.03

2.57

2011A

0.09

0.16

61.48

2011A

28.91 6.26

2.63

2012A

1.23

0.43

0.12

2012A

0.16

0.30

39.36

2012A

33.06 5.95

2.14

2013A

1.34

0.57

0.18

2013A

0.14

0.26

23.88

2013A

27.44 5.95

2.04

30

Profitability Ratios Operating Profit Margin Net Margin ROA ROE (Book Value) Greenblatt Ratios EBIT/Tangible Assets EBIT/EV 2009A

5.13% 3.17% 7.98% 13.95%

2009A

14.32% 0.075

Ratio Analysis

2010A

5.13% 3.10% 7.96% 14.52%

2010A

15.11% 0.088

2011A

6.05% 3.76% 9.89% 18.28%

2011A

16.64% 0.074

2012A 2013A

4.84% 2.97% 6.36% 11.66%

2012A

15.37% 0.103

5.46% 3.39% 6.91% 12.59%

2013A

15.07% 0.059

31

DuPont

DuPont Analysis Tax Burden Interest Burden Operating Profit Margin Asset Turnover Leverage ROE 2009A

0.6340

0.9744

5.127% 2.5191

1.7489

13.95%

2010A

0.6199

0.9754

5.129% 2.5659

1.8247

14.52%

2011A

0.6320

0.9837

6.047% 2.6293

1.8491

18.28%

2012A

0.6300

0.9746

4.836% 2.1407

1.8349

11.66%

2013A

0.6290

0.9886

5.456% 2.0354

1.8238

12.59%

Dupont Analysis

3,0000 2,5000 2,0000 1,5000 1,0000 0,5000 0,0000 Tax Burden Interest Burden Operating Profit Margin Asset Turnover Leverage ROE

32

2009A 2010A 2011A 2012A 2013A

Walgreens Leases

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

2014 2015 2016 2017 2018 Later

Total minimum lease payment Capital Leases (in $mil)

19 19 18 17 15 270

$358 Operating Leases (in $mil)

$2,536 2,514 2,464 2,389 2,292 23,507

$35,702

Valuation

DCF, Relative valuation, Benjamin Graham formula

34

Cost of capital

Weighted average cost of debt Cost of equity using CAPM ROE (5 year average ROE) Cost of equity using goal post method Market value of debt Market value of equity Weight of debt Weight of equity Tax rate

Calculated WACC

Business Risk Premium

Adjusted WACC 1 (Calculated WACC + Business Risk Premium)

2.76% Weights 8.04% 70.00% 14.10% 30.00% 9.86% 5,086.30

57,354.30

8.15% 91.85% 35.00%

9.20%

1.00%

10.20%

Beta (From 1/3/2012 to 11/11/2013) Market risk premium (Rm-Rf) 10 year treasury yield Cost of equity using CAPM 0.8972

6.00% 2.66% 8.0429%

35

Free Cash Flow to Firm (Option Not Exercised)

EBIT Less: Income Taxes Plus: D&A Less: CapEx Less: Change in Working Capital FCFF to WAG FCFF to AB FCF used in DCF 2014P

4,322.79 1,512.97 1,169.60 1,383.20 738.52

1,857.70

$593.84

2,451.54 2015P 2016P

4,538.92 4,765.87 1,588.62 1,668.05 1,169.60 1,169.60 1,383.20 1,383.20 279.38 293.34

2,457.33 2,590.87

$611.66 $630.01

3,068.99 3,220.88 2017P

5,004.16 1,751.46 1,169.60 1,383.20 308.01

2,731.10

$648.91

3,380.01 2018P

5,254.37 1,839.03 1,169.60 1,383.20 323.41

2,878.33

$668.38

3,546.71 36

Free Cash Flow to Firm (Option Exercised)

EBIT Less: Income Taxes Plus: D&A Less: CapEx Less: Change in Working Capital FCFF to WAG FCFF to AB FCF used in DCF 2014P

4,322.79 1,512.97 1,169.60 1,383.20

2015P 2016P

4,538.92 4,765.87 1,588.62 1,668.05 1,169.60 1,169.60 1,383.20 1,383.20

2017P

5,004.16 1,751.46 1,169.60 1,383.20

2018P

5,254.37 1,839.03 1,169.60 1,383.20 738.52

1,857.70

279.38 293.34

2,457.33 2,590.87

308.01

2,731.10

323.41

2,878.33

$593.84 $1,359.24 $1,400.02 $1,442.02 $1,485.28

2,451.54 3,816.57 3,990.90 4,173.12 4,363.62 37

DCF Valuation

Option Not Exercised Option Exercised WACC Terminal Value (at 2018) Terminal Growth Rate Implied Enterprise Value Plus: Cash Less: Debt Value of equity Shares Outstanding Estimated price per share

10.203% $59,463.60 4.00% $ 48,215.01 $5,086.30

$43,128.71 955.20

$45.15

WACC Terminal Value (at 2018) Terminal Growth Rate Implied Enterprise Value Plus: Cash Less: Debt Value of equity Shares Outstanding Estimated price per share

10.203% $73,159.71 4.00% $58,872.35 $5,086.30

$53,786.05 955.20

$56.31

38

Company Name

Comparable Companies

Market Capitalization Revenue AmerisourceBergen Corporation (NYSE:ABC) Cardinal Health, Inc. (NYSE:CAH) CVS Caremark Corporation (NYSE:CVS) Express Scripts Holding Company (NasdaqGS:ESRX) Omnicare Inc. (NYSE:OCR) Rite Aid Corporation (NYSE:RAD) Safeway Inc. (NYSE:SWY) Walgreen Co. (NYSE:WAG)

15,821.2 114,215.89 21,830.6 84,901.05 77,513.5 130,339.21 53,126.4 102,289.36 5,944.0 4,819.1 8,369.0 57,354.3 6,519.66 25,438.02 38,407.02 75,437.34

Subjective weight

10.00% 5.00% 40.00% 5.00% 5.00% 25.00% 10.00%

39

Relative Valuation

TEV/Total Revenues TEV/EBIT TEV/EBITDA TEV/Forward Total Revenue (Capital IQ) TEV/Forward EBITDA (Capital IQ) P/Diluted EPS Before Extra Forward P/E (Capital IQ) Price/Sales

Multiple value*

0.5x

12.2x

9.2x

0.5x

8.8x

24.1x

16.9x

0.4x

Implied price per share

$37.33

$46.88

$43.17

$38.79

$47.95

$60.44

$61.16

$30.92

Implied Price per Share Weighted average (using subjective weights for companies) $45.83

40 *Using subjective weights for companies

Benjamin Graham's Formula

Ben Graham Formula (Option not exercised) Current (normal earnings) Expected annual growth rate (%) Number of shares Estimated price per share Ben Graham Formula (Option exercised) Current (normal earnings) Expected annual growth rate (%) Number of shares Estimated price per share

$3,190.06 4.00

955.20

$41.75

$4,223.50 4.00

955.20

$55.27 41

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

42

Valuation Results

Discounted cash flow Benjamin Graham's formula Relative valuation

Option not exercised

$45.15

$41.75 $45.83

Option exercised

$56.31

$55.27 -

43

Recommendation

SELL

200 Shares @ Market Price

Expected gain $6,880 if sold at $59.40 per share

44