It was not that long ago that Walgreen Co. (NYSE: WAG) sold off its PBM unit to Catalyst Health Solutions, Inc. (NASDAQ: CHSI).  The deal was valued around $525 million, and now Walgreen has turned around in very short order by announcing a $429 million cash buyout of Drugstore.com Inc. (NASDAQ: DSCM).  Was it worth it?

Walgreen recently was not exactly given a huge endorsement by investors after earnings earlier this week.  The $37 billion company can of course afford to make this deal at whatever price it chose to.  After all, $37 billion versus $429 million sounds like a line-item.  At issue is that the buyout came at more than a 100% premium to Wednesday’s closing price.

Drugstore.com’s board has approved the deal and the old prices north of $50.00 from the old dot-com bubble days are ancient history.  This stock has not really traded above $4.00 during the last five years.

It seems that Walgreen is buying the domain names here rather than just the standalone business.  The few analysts that follow Drugstore.com have revenue estimates at $529.6 million for 2011 and $613.4 million for 2012 versus more than $70 billion a year for Walgreen.  Along with the Drugstore “dot-com” domain, other domains owned by the target company are VisionDirect, SkinStore, and Beauty “dot-com” sites.  This deal is on top of a fairly recent Walgreen acquisition of Duane Reade for its New York presence.

Where this gets interesting is that Drugstore “dot-com” has a much larger value inside a company like Walgreen that it does on its own.  Walgreen has far deeper pockets and it has a much larger platform that is there to be leveraged immediately.  If this was a private equity firm making the acquisition it may make little sense at all.  If it is Walgreen making a bolt-on acquisition, then the deal makes easy sense.

Drugstore shares are up 111% at $3.78 and Walgreen shares are up 1.3% at $40.35.

JON C. OGG

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