Boots Falls To Private Equity
The first leveraged buyout of a FTSE 100 company will face particular scrutiny given Boots' status as a national treasure.
The barbarians are no longer at the gate. They have stormed the citadel, or more precisely the Boots checkout counter. Without some unimaginable setback, Alliance Boots will shortly become the first FTSE 100 company to succumb to a private equity bid – the largest seen in Europe.
Those opposing the deal at least have the consolation that Boots is selling out to a class act. Kohlberg Kravis Roberts, whose stalking of RJR Nabisco 19 years ago was immortalised in the film Barbarians at the Gate, is led by Henry Kravis – considered by many to be the father of modern private equity. Moreover, KKR has paid top whack at £11bn. Only a few months ago Boots was regarded as a company that had lost its way.
KKR has gone out of its way to head off the inevitability of attacks portraying it as a job-cutter and asset-stripper: it promises it will not close stores or lay off staff – and will even look at opening more pharmacies.
It deployed these arguments to good effect in February when it won the support of Stefano Pessina, the Italian magnate who merged his Alliance UniChem business with Boots, taking the deputy chairmanship and 15% of the equity. Pessina, who stated he would co-operate with no other buyer but KKR, proved pivotal in securing the deal.
Indeed, there remains a strong feeling among fund managers that they may have been mugged by an inside job. It doesn't feel like a mugging, because of the hefty £11.39 per share eventually paid. But that was only flushed out when a serious counter-bidder – a consortium led by Guy Hands' Terra Firma group and the Wellcome Trust – emerged. Both Boots' shareholders and management owe them a debt.
"Boots is a critically important national institution," said Hands as he conceded defeat. Given its status as a national treasure and its crucial role as a distributor to the NHS, few would disagree, but having paid such a massive premium, it's questionable whether KKR can extract the customary 20% return from its investment without rocking the boat.
The real circus is just beginning. Pessina argues he can drive Boots faster as a privately held group, but if he hopes this will happen away from the public hurly-burly... he should think again.
Failure to meet the loudly stated goals of the deal – and explain progress along the way – could rebound on the whole private equity industry. It is a big responsibility; KKR's peers must hope that Stefano Pessina is ready to shoulder it.
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