A controversial £106 million break fee at the heart of the £10.6 billion takeover bid by KKR, the private equity house, for Alliance Boots is raising tempers in the bitter battle for control of the FTSE 100-listed pharmacy company.

Break fees equating to as much as 1 per cent of the value of any deal are tolerated by many investors as a price worth paying to encourage bidders to table takeover offers delivering quick and certain investment profits. However, they are not approved of universally. Some investors think that they restrict the creation of open auctions for companies and instill short-termist instincts.

The £106 million break fee is payable to KKR if the Boots board goes back on an agreement to recommend the £10.6 billion terms outlined on Friday.

Sources within Terra Firma, the investment company headed by Guy Hands, maintain that the break fee is at least £50 million too much. They believe that the £106 million fee, worth 11p per Alliance Boots share, far outstrips the costs incurred by the KKR consortium.

“I can imagine them having spent £50 million but from now on the fees do not go up dramatically,” one source said. “But 1 per cent is a lot of money. They may be making a handsome profit.”

While lawyers and accountants typically bill for time spent, at least two thirds of investment bankers’ fees — by far the largest before financing costs — are usually payable only when a deal is completed. On a deal of this size, the largest private equity deal seen in Europe, banks could be charging up to £20 million each for corporate finance advice.

KKR has spent “significant” sums so far, according to insiders. It is believed to have spent four and a half months working on its takeover approach before last Friday’s recommendation. Insiders also indicated that any profit from a break fee would be split between the funds and its investment advisers, led by JPMorgan Cazenove and Merrill Lynch and lawyers at Clifford Chance.

Terra Firma, in combination with HBOS, the bank, and Wellcome Trust, the healthcare foundation, is hoping to wrest control of Boots. It has made an indicative offer of £11.15 per share, worth £10.9 billion. This is 25p per share or £300 million more than the offer on the table from KKR and Stefano Pessina, the company’s deputy chairman and 15 per cent shareholder.

In reports that further suggest deteriorating relations between the protagonists, it is suggested that the Terra Firma-led consortium will strip Boots of valuable assets. These reports, it is thought, emanate from advisers close to the KKR/ Pessina camp. Each side appears to be accusing the other of plotting a Boots break-up that is against the interest of thousands of workers.

The Terra Firma grouping is expected to start due diligence at the City offices of the law firm Slaughter and May as early as tomorrow. The exercise could last a fortnight. It has hired Lehman Brothers, Gleacher Shacklock and Avington for financial advice, and Weil, Gotshal & Manges for legal work. A debt package is being finalised by Lehman with support from HBOS and HSBC and about five other banks.

Meanwhile Celesio, of Germany, which trades under the Lloyds brand, is sitting on the sidelines, “weighing up its options”, according to a source close to the group, on whether to join forces with Terra Firma or another private equity firm.

Terra Firma is one of several firms considering the possible acquisition of 26 BUPA hospitals for about £1.25 billion.

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