A multibillion-pound battle for control of Alliance Boots broke out today as the health and beauty group’s directors accepted a £10.6bn bid – only to see it trumped by a rival consortium offering shareholders an extra £200m.
The Alliance Boots board voted to recommend a formal £10.90-a-share bid from the private equity group Kohlberg Kravis Roberts and Boots’s deputy chairman Stefano Pessina at a board meeting late on Thursday night. The bidders had proposed to pay £10.60 but were forced higher when the Alliance Boots board told them that Terra Firma was planning a £10.85 offer.
Their new bid is £900m more than KKR first offered six weeks ago – and £3bn more than most City analysts thought the company was worth before either bid emerged.
However, less than four hours after Alliance Boots and KKR announced they had reached a deal, Terra Firma, run by the financier Guy Hands, and his partner, the Wellcome Trust, slapped an even higher proposed bid on the table, of £11.26 a share. That bid is subject to Hands’s team completing due diligence and is not yet a formal offer.
Alliance Boots shares closed up 75.5p at £11.25 – suggesting traders believe that KKR will return with a yet higher offer. One analyst, Luca Solca of Bernstein, said a private-equity buyer could afford to pay up to £13, which would value the business at £12.6bn.
Terra Firma’s offer of £11.26 will actually be reduced to £11.15 – or £10.8bn – for shareholders. The top slice of the bid would be diverted to pay a record £106m “break fee” that Alliance Boots has agreed to hand over to KKR and Pessina if it eventually backs a different deal.
The bid battle almost certainly signals the end for Boots – one of the most trusted high street brands – as a publicly listed company. It will also be the first FTSE-100 company to fall into private hands and the biggest such buyout ever witnessed in Europe, worth some £3bn more than the Apax-led bid for Tele Danmark in 2005.
The business, created by the merger of Boots and Alliance Unichem only seven months ago, operates 2,600 UK pharmacies and has a drugs distribution network spanning 14 countries. It has more than 100,000 staff.
KKR has yet to reach agreement with the trustees, but the schemes are relatively well funded and KKR said the negotiations were “amicable”.
In a note for RBC Capital Markets, the pension consultant John Ralfe – who used to run the Boots scheme – said the trustees were in “a very powerful negotiating position”. He believes they could win a cash injection into the fund of up to £500m.
Funding is unlikely to be a problem. Terra Firma has added HBOS to its team as an equity partner. A source close to Mr Hands said banks were queuing up to back their offer: “They are twice oversubscribed on the debt.” HBOS and HSBC are among the banks ready to provide financing.
KKR and Mr Pessina have lined up eight banks to back their bid, including Barclays, Citigroup, Royal Bank of Scotland and Merril Lynch – who quit as Alliance Boots house broker to join the deputy chairman’s bid team.
Today there were few details forthcoming about how the deal will be structured and how much debt KKR and Mr Pessina plan to pile into the company. However, Mr Pessina would swap three quarters of his 15% Alliance Boots stake for shares in AB Acquisitions – the company they plan to use to acquire the business. In return he will be given joint control of the business.
The 65-year-old Italian said he intended to crank up the pace of expansion with an aggressive acquisitions strategy. “Pace and focus is the main reason we are doing this,” he said. He added that he was not a natural public company director: “I am an entrepreneur. I am a completely different kind of animal.”
Some analysts have calculated that Mr Pessina could double his £1bn investment in less than five years if the deal is successful, but he insisted he was not doing the deal to boost his own personal fortune: “I am 65. I have all the money I need – more than people think – and I am still working seven days a weeks and 10 or 11 hours a day. I am not doing this for the money.”
Terra Firma has requested further financial information and a meeting with Boots management, which is expected to take place next week.
The bid comes amid mounting hostility to private-equity buyouts from unions, MPs and some businessmen, who accuse the buyout specialists of asset stripping and unneccessary secrecy. Yesterday Mr Pessina said he intended to run one of the most “transparent” private equity-owned firms and promised to publish a detailed “annual review” of the business.
The unions, however, remain concerned. The GMB general secretary, Paul Kenny, has written to the health secretary, Patricia Hewitt, and the trade secretary, Alistair Darling, asking them to call in Mr Pessina to provide reassurance that his plan will not harm local pharmacies or increase the cost of drugs to the NHS.
“We won’t close down any stores or any pharmacies,” Mr Pessina said. “If we close one it is just a gift to someone else. It just doesn’t make any sense.”
The Transport and General Workers Union said the battle for Boots would inevitably mean “extraction rather than creation of wealth”.The TUC general secretary, Brendan Barber, has written to the bidders asking them to spell out their plans for the business.
Sir Nigel Rudd, chairman of Alliance Boots, said the offer from KKR reflected the “hugely valuable business” created by last year’s merger: “I am delighted that the board has been able to achieve such a good price for shareholders.”
Julia Finch, City editor
Friday April 20, 2007
Guardian Unlimited