April 14, 2011, 12:22 PM

More details emerge on Walgreen’s pending takeover of Drugstore.com

Drugstore CEO Dawn Lepore’s severance package is worth $6.3 million.

Mark Brohan

Research Director

Lead Photo

The deal for Walgreen Co. to acquire Drugstore.com was nearly a year in the making, with a New York investment banking firm acting as the initial third party in getting the negotiations underway, Drugstore.com says in a new filing with the U.S. Securities and Exchange Commission.

The filing also reveals that Drugstore.com CEO Dawn Lepore will be eligible for a severance package worth about $6.3 million once the deal is complete, if she leaves the company.

In March, Walgreen, No. 68 in the Internet Retailer Top 500 Guide, announced plans to purchase Drugstore.com, No. 46, in a deal valued at $429 million. Under the terms of the deal, Walgreens will pay $3.80 per share for Drugstore.com’s common stock. Walgreens expects the deal to close by the end of June.

But talks between Walgreen and Drugstore.com began in March 2010 when Sonenshine Partners LLC, a New York investment banking firm, began working with Walgreen on a number of strategic initiatives, including ways to expand the retailer’s e-commerce business. At the same time Sonenshine also was working with Drugstore.com on its own business development projects.

Sonenshine wasn’t hired as a merger specialist in the Walgreen and Drugstore.com deal, but the banking firm did introduce the two retailers. That introduction, in turn, led to a series of preliminary meetings from March through July, preliminary negotiations and the exchange of proprietary information from August through the end of 2010, and final talks and a deal in the first quarter.

In its regulatory filing, Drugstore.com also says a newly updated employment agreement between the company and Lepore would pay her a base severance package of about $2.8 million and another $3.5 million in stock options and other compensation. The updated agreement signed between Lepore and Drugstore.com on April 8 gives Lepore two years of base salary and her annual bonus based on certain performance objectives, 12 additional months of vested stock options and other equity awards, and 18 months of health insurance premiums.

Drugstore and Walgreen’s have not said what role—if any—Lepore would play in the company once the merger is complete. But the filing says Drugstore.com’s severance package assumes that she would leave the company around May 19.

The filing also reveals other details of the transaction. Walgreen formed a new subsidiary—Dover Subsidiary Inc.—to deal with all aspects of the transaction. The filing also revealed that other parties had approached Drugstore.com about a possible purchase, but didn’t provide any names.

For the year ended Jan. 2, Drugstore.com reported:

• Sales increased 21.5% to $456.5 million from $375.6 million in 2009.

• Net loss was $3.6 million compared with a net loss of $1.4 million in 2009.

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