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Sept. 9 (Bloomberg) -- Walgreen Co. will be pressured to boost a $3 billion share buyback that disappointed investors last month after activist hedge fund Jana Partners LLC struck a deal yesterday on three board seats at the U.S. drugstore chain, said a person familiar with the matter.

Jana will use the positions to push for more of Walgreen’s capital to be put toward repurchases, said the person, who spoke on condition of anonymity because the discussions are private. The settlement, which immediately added Jana founder Barry Rosenstein to the board, comes after Walgreen last month agreed to buy the rest of European health and beauty chain Alliance Boots GmbH for $15.3 billion.

Jana and other investors have agitated for a more shareholder-friendly use of Walgreen’s cash, and urged it to run more like Bern, Switzerland-based Alliance Boots. Making those changes would mean improving margins, increasing sales and boosting offerings such as beauty products.

The shareholder pressure has created a power shift atop Deerfield, Illinois-based Walgreen that has split authority with Alliance Boot’s management, including a board seat for Alliance Boots Chairman Stefano Pessina and the appointment of Alliance Boots executives to key roles.

Walgreen shareholders, including Jana, are seeking to increase the buyback by at least several billion dollars.

“The buyback was smaller than expected and, historically, they’ve kept an extremely conservative balance sheet,” said Jeff Jonas, associated portfolio manager at Gabelli Funds, a Walgreen shareholder, in an interview before Jana won the board seats. Jonas said investors had expected $5 billion to $10 billion in share repurchases.

Months of Talks

Along with buying the rest of Alliance Boots, Walgreen last month cut its adjusted earnings forecast by about $2 billion and said it wouldn’t move its legal address abroad for a lower tax rate.

After taking a position in Walgreen this year and engaging in months of talks, Jana’s Rosenstein settled for a spot on Walgreen’s board and his choice of a second director. Rosenstein runs the $11 billion investment fund and, together with Walgreen, will choose a third director if one of what will be 15 board seats opens, the pharmacy retailer said. Jana owned 1.2 percent of Walgreen shares as of June 30, according to data compiled by Bloomberg.

Walgreen officials said in August that they didn’t offer a bigger buyback because they wanted to reserve money for deals and protect the company’s credit rating.

The company has acknowledged the feedback it received from unhappy investors and said the board will “keep it in mind as it considers future activity,” Michael Polzin, a Walgreen spokesman, said in a telephone interview.

Alliance Boots spokeswoman Laura Vergani declined to comment on Jana’s involvement.

To contact the reporters on this story: Cynthia Koons in New York at ckoons@bloomberg.net; Beth Jinks in New York at bjinks1@bloomberg.net To contact the editors responsible for this story: Reg Gale at rgale5@bloomberg.net; Mohammed Hadi at mhadi1@bloomberg.net Drew Armstrong, Andrew Pollack

Bloomberg