Kroger Co. could consider selling its pharmacy business in the wake of its new arrangement to have some of its products sold at Walgreens stores, an analyst said.
It would make sense for both companies if Kroger would sell its pharmacy business to Walgreens, and it’s possible the deal could happen, Edward Kelly, an analyst who follows Kroger (NYSE: KR) for Wells Fargo, said in a research report issued Wednesday. As a result, Walgreens would continue to operate the pharmacies in Kroger stores.
“We believe a potential next step could be the sale of its pharmacy business,” Kelly wrote. “The strategic argument is stronger than ever given structural changes in pharmacy, there looks to be an underappreciated opportunity to unlock material value and it seems highly aligned with management’s more progressive approach.”
Kelly estimates Kroger could get about $4.6 billion from the sale of its pharmacy business, and it would get rental income from Walgreens that he estimates at about $31 million a year.
Cincinnati-based Kroger, the nation’s largest operator of traditional supermarkets, and Walgreens agreed to a deal announced Tuesday that will enable customers to order Kroger products online and pick them up at Walgreens stores. Walgreens will also carry some of Kroger’s store brand products, including some Simple Truth natural and organic products. They’re initially testing the program at 13 Walgreens stores in Northern Kentucky. Walgreens has 9,800 drug stores nationwide and about three-fourths of Americans live within five miles of one of its stores.
“This news may be only the beginning of a deeper relationship between the two companies,” Kelly wrote. “Dialogue between the companies on ways to create value could foretell a more significant relationship. Kroger has historically stated that it likes pharmacy and sees value in retaining ownership, but the food and drug retail industries are evolving rapidly and we believe a transaction would make a lot of sense for both parties.”
Source: Cincinnati Business Journal