Guy Hands' Terra Firma swooped on Alliance Boots on Friday with a £10.9 billion bid proposal, trumping an agreed offer from US rival KKR and Stefano Pessina, the group's deputy chairman and kicking off the first private equity bid battle for a FTSE 100 company.

KKR and Mr Pessina had worked frantically through the night to agree the deal, Europe's biggest ever buyout, to acquire Alliance Boots, agreeing to pay £10.90 a share, 4.8 per cent above their earlier offer of £10.40.

In the early hours their banking advisors Goldman Sachs and Merrill Lynch attempted a "dawn raid" on Boots shares, buying them on the market at the £10.90 price. By acquiring 5 per cent, they aimed to have a blocking stake together with Mr Pessina's 15 per cent.

But just hours after the recommended deal was announced, Terra Firma and its partners, Wellcome Trust, the medical charity and HBOS, the British bank, submitted a higher bid proposal of £11.26, stopping Goldman's dawn raid in its tracks. KKR's team are thought to have accumulated around 2 per cent. Not enough to block a rival bidder.

Terra Firm's bid was not recommended and the private equity firm said it needed access to more information, as well as meetings with Alliance Boots management led by chief executive Richard Baker, in order to firm up its offer.

It urged shareholders to take no action. "A request has been made for limited additional due diligence and a response is awaited," the consortium said.

Alliance Boots shot back saying it would continue to recommend KKR's bid and insisting that it was already providing Mr Hands "high level" access to senior management.

If so, Mr Hands should be able to table a rival firm offer within a couple of weeks, although Terra Firma said there was no guarantee an offer would be made.

Shares in Alliance Boots surged more than 8.5 per cent , to £11.38, topping both bids.

Terra Firma said it first signalled its indicative offer of £10.85 on Tuesday night , trumped by KKR this morning. It said its latest offer of £11.26 a share would be reduced to £11.15 a share if it was successful and had to pay an £106 million break fee to KKR and Mr Pessina for derailing their bid.

The City is now looking for an all-out takeover battle for Alliance Boots, which has 1,500 stores and 1,000 community pharmacies.

Andrew Wade and Richard Ratner at Seymour Pierce, who had earlier predicted the chances of a counter-bidder as slim, said: "We believe investors would be best to hold fire at this stage – we would not be surprised, should the Terra Firma consortium find its offer recommended by the Board, to see KKR/Pessina up its bid."

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