Walgreen Co. (Walgreens Boots Alliance) Ricky Fang, Jacob Stoiber, & Kevin Farshchi Presented October 30, 2014

Agenda Investment Thesis Macroeconomic Overview Industry Analysis Walgreen & Its Business Catalysts & Concerns (SWOT) Financial Analysis Valuation Recommendation

Investment Thesis Walgreens Boots Alliance is likely to become the principal retail pharmacy in the world Our team is confident that recent financial results, merger valuation, and strategic initiatives demonstrate Walgreen is an attractive holding in the long term. Granted, there is a chance the next few quarters/years may experience some tough adjustments and potential volatility, we are optimistic that long-term shareholders have an opportunity for increasing return on invested capital The recent sales increases in conjunction with a strong balance sheet indicate that Walgreen is in a solid financial position to create opportunities for growth through its strategic acquisition of Alliance Boots In conclusion, if we apply proper valuation and identify mispriced businesses, the market should agree with us in the long term and price should reflect fair value.

Transaction History & Current Position Original purchase: 1000 shares @ $25/share; Date purchased: October. 6th. 1999 (Cost basis: $ 25000) Action 1: 500 shares sold @ 49.94/share; Date sold: September 20th, 2006 Action 2: 200 shares sold @ 60.35/share; Date sold: November 22nd, 2013 Current position: 300 shares trading at $62.83/ share as of October. 29th, 2014 (Cost basis: $18,849)

Macroeconomic Overview Booming Domestic Economy and Weak Economy in Europe GDP number: $14.41, 14.96,15.53,16.24,16.8 trillion from 2009-2013 respectively with an estimate of 17.42 trillion for 2014 GDP decomposition: Y=C+I+G+NX; Consumer spending grew for the first time since 2004. Unemployment rate: 9.3%, 9.6%,8.9%, 8.1%, 7.4% in 2009-2013 and 5.9% reported in Sep. 2014 Low economic growth rate/ recession features in Europe: (-4.5%, 2%, 1.6%,-0.4%,0.1% GDP growth rate in 2009-2013) http://blog.bea.gov/category/gdp/ GDP growth rates -2.8%, 2.51%, 1.85%, 2.78%, 1.88% from 2009-2013, respectively Source: http://clients1.ibisworld.com/reports/us/bed/default.aspx?bedid=33 Source:

Macroeconomic Overview Projected

Macroeconomic Overview Healthcare insurance provider: private insurance, Medicare & Medicaid, Affordable Care Act (Obamacare) Percentage of uninsured Americans dropped from 18% in 2013 to 13.4% in May 2014. Federal funding for Medicare and Medicaid add up to $ 827.6 billion in 2014 with roughly 4% annual growth Medicare: Part of US social security program, targeting senior citizens(65+), guarantee access to healthcare insurance Medicaid: Specifically target people with low income and limited resource Obamacare: Features to guarantee everyone to healthcare insurance by implementing various regulations such as employer mandate (companies >50 employers and don’t offer health insurance to employees have to pay tax penalty) nd Medicaid

Pharmacies & Drug Stores Turk, Sarah. "IBISWorld Industry Report 44611 Pharmacies & Drug Stores in the US." IBIS. N.p., Aug. 2014. Web. Oct. 2014. <http%3A%2F%2Fclients1.ibisworld.com%2Freports%2Fus%2Findustry%2Fdefault.aspx%3Fentid%3D4620>.

Industry Analysis- Porter’s Five Forces Rooms for smaller business; Industry concentration Threat of new entrants: Medium More usage of online-ordering Face competition in general merchandise with supermarket Threat of Substitutes: High Relatively for individuals High because of the existence of public health insurance and PBM (Prescription Benefits Managers) Bargaining Power of Buyers: Medium Maintain by being industry giants Strong, long-term relationship with suppliers Bargaining Power of Suppliers: Multiple competitors including other drug retail chain, supermarket, independent drug store, online drug ordering and mail-order drugs Rivalry among existing Firms: High PBM (Prescription Benefits Managers)= a third party administrator of prescription drug programs Turk, Sarah. "IBISWorld Industry Report 44611 Pharmacies & Drug Stores in the US." IBIS., Aug. 2014. Web. Oct. 2014. <http%3A%2F%2Fclients1.ibisworld.com%2Freports%2Fus%2Findustry%2Fdefault.aspx%3Fentid%3D4620>.

Introduction to Walgreens Walgreens primarily sells prescription and non-prescription drugs The company also sells general merchandise: convenience and fresh foods, household items, personal care, photofinishing and beauty care. Walgreens Co. and subsidiaries are the largest drugstore chain in the US As of August 31, 2014 Walgreens operates 8,309 stores and accounted for net sales of $76.4 billion Approximately 76% of the US population is within a 5 mile radius of a Walgreens store Source: Walgreen Co., FY14 Form 10 K for the Period Ending August 31, 2014, p. 3, from http://investor.walgreens.com/sec.cfm, accessed October 26, 2014

The Business Three main business segments GICS classification: Prescription drugs (65% of net sales) Non-prescription drugs (25% of net sales) General merchandise (10% of net sales) Distribution pipeline Key Supplier: AmerisourceBergen Buyers: pharmacy benefit managers (Express Scripts), private health systems, public healthcare sector GICS classification: Sector: Consumer Staples Industry: Food and Staples Retailing Sub-Industry: Drug Retail Source: Walgreen Co., FY14 Form 10 K for the Period Ending August 31, 2014, p. 5, from http://investor.walgreens.com/sec.cfm, accessed October 26, 2014

Management Gregory D. Wasson President and CEO New executive members from Alliance & Boots: Stefano Pessina (Executive Vice Chairman), Ornella Barra (president and chief executive of global wholesale and international retail) Two members of activist investor Jana Partners LLC will join the board Walgreens appointed new CFO Timothy McLevish on August 4. 2014 and he has a history of cost control and financial discipline Management Focus Three year “Next Chapter” Plan Cost reduction initiative Capital Allocation Policy Three year “Next Chapter” Plan: A differentiated retail experience that transforms retail model for health, wellness and changes the way women shop for beauty Integrated pharmacy and health care that advance the role of pharmacists and provide access to innovative health care services Global pharmaceutical services that reinvent the pharmaceutical value chain and deliver a seamless specialty pharmacy model Cost reduction initiative: Effort in corporate, field and store-level cost reductions targeted to achieve $1 billion in savings by end of fiscal 2017 “Walgreens has demonstrated strong focus on cost control as adjusted SG&A growth has slowed … and move forward integrating Walgreens and Alliance Boots.” Watson (2014 10-k item 7 MD&A) Capital Allocation Policy: Continue to invest in its core business such as driving organic growth Pursuing strategic opportunities such as Mergers and Acquisitions Maintain strong balance sheet and financial flexibility with commitment to solid credit rating and govern future capital allocation Returning cash to shareholders by targeting a 30-35 percent long-term dividend payout ratio and a new $3 billion share repurchase "Walgreens Board of Directors Exercises Option to Complete Second Step of Strategic Partnership with Alliance Boots and Fully Combine Both Companies, Creating First Global Pharmacy-Led, Health and Wellbeing Enterprise." Walgreen Co. N.p., 06 Aug. 2014. Web. 29 Oct. 2014. <http://investor.walgreens.com/releasedetail.cfm?ReleaseID=864504>.

Management – key points 1. Moody’s rating downgraded their credit rating of subordinated debt 2. Ex-CFO dispute 3. Concerns for stock repurchases 4. Still need to wait to see how synergies are realized 5. Concerns for new executives: board members for Jana 6. Decision to not complete tax inversion disappointed investors back in September

Walgreens (NYSE: WAG) Price: $62.83 Beta: 0.964 Market Cap: 59.712.8 Billion Shares outstanding 950.4 M Dividend Yield: 2.15% EPS: $2.00 52 week high: 76.39 52 week low: 54.86 Data assessed from Bloomberg Terminal

We can think of a 200 day as a trading year and a 20 day as a month

Alliance Boots Acquisition On August 2, 2012, Walgreens acquired a 45% equity stake in Alliance Boots GmbH On August 5, 2014, the Purchase and Option Agreement was amended to permit the exercise of the call option and Walgreen exercised the call option on August 5, 2014 The company will have over 11,000 stores across the US, Asia, and the EU as a result “Immediately prior to the reorganization, shareholders will 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.” Source: Walgreen Co., FY14 Form 10 K for the Period Ending August 31, 2014, p. 10, from http://investor.walgreens.com/sec.cfm, accessed October 26, 2014

Strengths/Catalysts Predicted growth of retail and prescriptions sales based on macro assessment Aging population, ACA, and stronger US economy Strong recent financial results (Discussed later) Partnerships create a global powerhouse AmerisourceBergen ten-year distribution agreement established the world’s largest buyer of prescription drugs Express Scripts, the largest global PBM, will increase customer base Alliance Boots acquisition: cost synergies and addition to top line in the long term Combined synergies across both companies were approximately $491 million in fiscal 2014 and management estimates fiscal year 2015 combined synergies to be $650 million. Walgreen reported its biggest jump in quarterly sales in three years on Tuesday, driven by a 9.3 percent rise in prescription sales in the fourth quarter. Also have a minority interest in ABC Walgreens filed ~699 million prescriptions in FY 2014 (an increase of 16 million from FY 2013) "Walgreens Board of Directors Exercises Option to Complete Second Step of Strategic Partnership with Alliance Boots and Fully Combine Both Companies, Creating First Global Pharmacy-Led, Health and Wellbeing Enterprise." Walgreen Co. N.p., 06 Aug. 2014. Web. 29 Oct. 2014. <http://investor.walgreens.com/releasedetail.cfm?ReleaseID=864504>.

Risks/Concerns Slowdown of discretionary spending will disrupt front-end sales of general merchandise Seasonality of business Second fiscal quarter has much higher-front end sales due to the cough, cold, and flu season Operating leases can be viewed as debt The balance sheet does not reflect this liability Risk of PBM’s Partnership with AmerisourceBergen may not be realized to full potential Alliance Boots synergies and revenue stream may not come to fruition The goals of this acquisition will take time to achieve Exposure to EU: exchange rates, economic recession, government regulation are a few issues Dilution After the second step transaction, Walgreens shareholders will own a smaller percentage of Walgreens Boots Alliance common stock than they currently own. Summary of Quarterly Results (Unaudited)" in Part II, Item 8 of this Form 10-K Source: Walgreen Co., FY14 Form 10 K for the Period Ending August 31, 2014, p. 10, from http://investor.walgreens.com/sec.cfm, accessed October 26, 2014

Risks/Concerns Slowdown of discretionary spending will disrupt front-end sales of general merchandise Seasonality of business Operating leases can be viewed as debt The balance sheet does not reflect this liability Risk of PBM relationships in the future Partnership with AmerisourceBergen may not be realized to full potential Alliance Boots synergies and revenue stream may not come to fruition The goals of this acquisition will take time to achieve Exposure to EU: exchange rates, economic recession, government regulation are a few issues Dilution After the second step transaction, Walgreens shareholders will own a smaller percentage of Walgreens Boots Alliance common stock than they currently own. Second fiscal quarter has much higher-front end sales due to the cough, cold, and flu seaso Source: Walgreen Co., FY14 Form 10 K for the Period Ending August 31, 2014, p. 10, from http://investor.walgreens.com/sec.cfm, accessed October 26, 2014

Recent Financial Results Sales for September were $6.48 billion for FY 2015, an increase of 9.4% Comparable store sales increased by 7.9% during the month. Pharmacy sales accounted for 67.8% of total sales, and increased by 14.2%.1 Fiscal Year 2014 sales increased 5.8 percent to record $76.4 billion; Sales for September in FY 2015 increased 9.4% at $6.48 billion, an increase of 9.4% from $5.82 billion for the same month in fiscal 2014; Gross margin decreased to 28.2% in 2014 from 29.2% Met fourth quarter earning estimate(Adjusted EPS increased 1.4% to 74%) 1 "Walgreens September Sales Increase 9.4 Percent." Walgreen Co. N.p., 03 Oct. 2014. Web. 29 Oct. 2014. <http://investor.walgreens.com/releasedetail.cfm?ReleaseID=874420>.

Financial Analysis - Liquidity   2010 2011 2012 2013 2014 Current Ratio 1.604 1.524 1.234 1.337 1.376 Quick Ratio 0.611 0.529 0.427 0.565 0.693

Financial Analysis - Solvency   2010 2011 2012 2013 2014 Debt/Assets 0.091 0.088 0.161 0.142 0.121 Interest Coverage 40.682 61.479 39.364 23.879 26.885

Financial Analysis - Profitability   2010 2011 2012 2013 2014 Gross Margin 28.15% 28.39% 28.40% 29.24% 28.23% ROA 8.13% 10.10% 6.98% 7.11% 5.32% ROE 14.52% 18.28% 11.66% 12.59% 9.44%

Financial Analysis - DuPont DuPont Analysis   2010 2011 2012 2013 2014 Tax Burden 0.620 0.632 0.630 0.629 0.571 Interest Burden 0.975 0.984 0.989 0.848 Operating Profit Margin 0.051 0.060 0.048 0.055 Asset Turnover 2.566 2.629 2.141 2.035 2.055 Leverage 1.825 1.849 1.835 1.824 1.818 ROE 14.52% 18.28% 11.66% 12.59% 9.93%

Financial Analysis - Efficiency   2010 2011 2012 2013 2014 A/R Turnover 27.518 28.908 33.056 27.438 23.739 A/P Turnover 14.704 15.007 16.340 15.581 17.704 Inventory Turnover 9.138 8.974 10.181 10.540 12.573 Days Sales Outstanding (DSO) 13.264 12.626 11.042 13.303 15.376 Days Payable Outstanding 24.822 24.322 22.338 23.426 20.617 Days Inventory Outstanding 39.943 40.675 35.851 34.631 29.031 Cash Conversion Cycle 28.385 28.979 24.555 24.508 23.790

Financial Analysis – Joel Greenblatt Joel Greenblatt Ratios   2010 2011 2012 2013 2014 EBIT/Tangible Assets 0.250 0.307 0.246 0.290 0.305 EBIT/EV 0.049 0.061 0.047 0.053 0.057

Discount Rate Returns n 60 Risk Free Rate 2.37% µ 1.376% σ 0.083   2.37% µ 1.376% σ 0.083 WAG Annualized Return 17.82% CAPM Approach Rf Beta 0.964 MRP 7.29% E[r] Equity 9.398% Blended E[R] 15.713% Cost of Debt Capital Structure Summary Total Interest Expense 156.00 Total Debt 28,024.0 57.7% 4,510.00 Total Common Equity 20,457.0 42.1% 3.46% Total Minority Interest 104.0 0.2% Marginal Tax Rate 37% Total Capital 48,585.0 100.0% Tax Effected Cost of Debt 2.18% WACC 7.87% Business Risk Premium 1% Discount Rate 8.87%

Assumptions Select a Case: Base Case Revenue Assumptions FY 2015 Boom Case 5.00% 9.00% 7.00% Revenue Growth 3.0% 7.0% 5.0% Gross Profit Margin 29.5% 32.0% 35.0% Bust Case 1.0% SG&A as a % of Sales 22.5% Interest Expense/Operating Income 3.5% 4.0% 4.5% Tax Rate 37.0% Depreciation 10.0% Capital Expenditures 2.0% 1.7% Total Assets as a % of Revenue 44.4%

Discounted Cash Flow Valuation FCF Build - WAG   EBIT $5,507.86 $7,998.20 $11,260.63 $11,823.66 $9,255.56 9,255.56 Less: Taxes 1,976.77 2,855.76 3,999.78 4,177.89 3,253.33 Less: Capex 1,573.68 1,431.26 1,531.45 1,608.02 1,656.26 1,829.34 Less: Changes in NWC 1,983.99 242.13 259.08 198.01 124.75 Plus: D&A 1,477.41 1,580.83 1,691.48 1,776.06 Unlevered FCF 1,450.83 5,049.88 7,161.81 7,615.80 6,050.57 6,002.23 FCF Build - BOOTS 1,929.69 2,064.77 2,209.30 2,319.77 2,389.36 8.90 9.52 10.19 10.70 11.02 Less: CAPEX 463.71 496.17 530.90 557.45 574.17 774.58 (45.41) (45.83) (46.25) (46.67) (47.09) 625.56 669.35 716.21 752.02 2,128.05 2,274.25 2,430.66 2,550.30 2,625.84 2,378.34 Terminal Value Assumptions 3% Discount Rate (WACC + premium) 8.87% Terminal Value WAG 105,264.94 Terminal Value (WAG + BOOTS) 27,608.08 Discount Period (t) 1 2 3 4 5 PV of FCF's (WAG) 1,332.59 4,260.30 5,549.60 5,420.43 3,955.43 68,814.68 PV of FCF's (WAG + BOOTS) 3,287.21 6,178.96 7,433.08 7,235.56 5,672.01 18,048.19 PV of FCF's Terminal Value Equity Value Enterprise Value Net Debt DSO $/Share Perpetuity Method (WAG ONLY) 20,518.34 51,844.02 89,333.02 37,489.01 965.2 $ 53.71 Perpetuity Method (WAG + BOOTS) 50,325.17 86,862.87 81,612.53 137,188.04 55,575.51 $ 84.56

Comparables Valuation Company Name Weight TEV EBITDA EBIT Revenue TEV/EBITDA TEV/EBIT TEV/Revenue CVS Health Corporation 70% 110493.0 10429.0 8545.0 132053.0 10.6x 12.9x 0.8x Rite Aid Corporation 20% 10532.6 1157.9 750.1 25943.3 9.1x 14.0x 0.4x Wal-Mart Stores Inc. 8% 299142.9 35585.0 26590.0 480479.0 8.4x 11.3x 0.6x Express Scripts Holding Company 2% 69332.1 5802.7 3726.0 100355.9 11.9x 18.6x 0.7x 100% Walgreen Co. 62507.7 5141.0 3936.0 76392.0 12.2x 15.9x High Low Median 89912.6 8115.9 6135.5 116204.5 9.8x 13.5x Mean 122375.1 13243.7 9902.8 184707.8 10.0x 14.2x Weighted Average 10.1x 13.1x EV/EBITDA EV/EBIT EV/REVENUE Enterprise Value 52165.9 51687.6 55807.0 Less: Total Debt 4,510 Plus: Cash 2,646 Equity Value 50,302 49,824 53,943 Total Shares Outstanding 950 Intrinsic Value/Share $52.93 $52.42 $56.76 Average Value/Share   $54.04 Median Value/Share

Price Targets DCF: WAG + BOOTS = $84.56 (23.26% return) DCF: WAG only =$53.71 Comps (average) = $54.04

Our Recommendation HOLD