Sir Nigel Rudd had slept for barely two hours the previous night. And now he
had heard that his delicately crafted plans to accede to a record-breaking
bid for Alliance Boots, the company he chairs, faced a new challenge.
But Rudd, 60, looked remarkably relaxed — far more relaxed than one would
expect of a man who had spent the previous seven weeks trying to deal with
the biggest private-equity bid Europe has seen, as well as unravel a
nightmarish tangle of conflicts of interest between bidder and bid target.
At 11am on Friday, sitting in a ninth-floor office overlooking the City, Rudd
reflected that he had clambered into bed at his Belgravia home at 4 am, only
to be woken by the phone at six. He smiled: “Is it any wonder that my wife
can’t understand why I still do this job?”
The negotiations that had dragged on into the small hours had been at the
offices of City solicitors Slaughter and May. The Alliance Boots board had
met at six on Thursday evening. Within an hour-and-a-half, the directors had
agreed in principle that they would back a £10.6 billion takeover from the
buyout group Kohlberg Kravis Roberts (KKR) that would see the parent of
Boots, the chain of 2,600 outlets that has served generations of Britons,
move into private hands.
The deal was announced first thing on Friday — and by mid-morning, a rival
bidder, led by established dealmaker Guy Hands, was rattling the Alliance
Boots cage. KKR had bid high. Hands wanted to bid even higher.
The Alliance Boots saga has tested Rudd’s skills as a chairman to the full,
and he is no novice. He made his name with Williams Holdings, the
engineering conglomerate he built in the 1980s. He was chairman of the
glassmaker Pilkington when it agreed to a £2.2 billion takeover by Nippon
Sheet Glass last year. He chairs Pendragon, Britain’s largest car dealership
group. He sits on the board of BAE Systems. And he is deputy chairman of
Barclays.
But Alliance Boots has made everything else look simple by comparison.
Rudd steered Boots to a merger with Alliance Unichem last year — a deal that
left Stefano Pessina, who had been the driving force behind Alliance
Unichem, with 15% of the combined company.
Then late in February this year, Rudd received a message. Pessina, executive
deputy chairman of Alliance Boots, wanted to see him. The two men met at
Alliance Boots’s London offices in Oxford Street at 4.30pm on March 1.
“He gave me a letter from KKR indicating they wanted to make an offer for the
company,” said Rudd. “I hadn’t had a clue that this was coming.”
Immediately, Rudd saw the risks. This wasn’t a normal bid approach. Pessina was
one of the two key executives runing Alliance Boots, the other being chief
executive Richard Baker. To complicate matters further, Pessina was Boots’s
largest shareholder.
Over the following few hours, Rudd tried to put in place safeguards to ensure
that Pessina and his partner, Ornella Barra, who is also an Alliance Boots
director, were insulated from board discussion of the bid.
“I knew there were huge reputational risks for me,” said Rudd.
Within a week, news of KKR’s approach had been announced to the stock market.
The consortium was suggesting a possible bid at £10 a share, valuing Boots
at £9.5 billion. The company was in play. Its share price shot up.
KKR had been quietly looking at Alliance Boots for months. The company’s
steady cashflow looked attractive. And KKR suspected that its long-term
potential — serving the medical needs of an ageing European population —
were being undervalued by the stock market.
Various discreet approaches were made to Pessina. Without his support, the
idea was dead in the water. As both a key executive and a major shareholder,
he was the linchpin.
Initially, Pessina refused to meet KKR. But then, Edoardo Spezzotti, a
long-standing friend from the Italian banking group Unicredit, was asked by
KKR to have a word in Pessina’s ear: what did he have to lose?
Pessina arranged for his private lawyer in Paris to hold a meeting with KKR
partner Dominic Murphy to sound out what was being proposed. Then, on
February 1, Pessina met Murphy in Paris for the first of a series of
meetings that was to lead to the first private takeover of a FTSE 100
company.
Pessina saw the attraction of taking Alliance Boots private. He had become
increasingly frustrated with the way the stock market valued the business.
Most brokers were rating the company’s shares as overvalued. Pessina thought
of it as a healthcare business; analysts measured it as a retailer. He
wanted to expand by acquisition but knew that any really ambitious project
would be likely to spook shareholders.
After the Paris meeting, Pessina — spry, silver-haired and bespectacled —
wanted time to think. He headed off to America for a trip that had already
been arranged. “That first week was a week of reflection,” he said this
weekend. “Then I took my decision to seize the opportunity. And within 20
days, we had got everything together.”
They were 20 days of frantic activity for KKR. It had a raft of advisers
stitching together the financing for the record-breaking bid. Spezzotti was
one of them. JP Morgan Cazenove’s David Mayhew and Merrill Lynch’s Richard
Girling were also involved.
By the end of February, Pessina was in a position to call Rudd and put forward
his dramatic proposal.
As soon as news of the KKR / Pessina approach got out, it was clear that Rudd
was in an awkward position. He had to show that he was prepared to be as
firm with Pessina — the man he had sat next to in the boardroom for the past
eight months — as he would be with an outside bidder. He could not afford to
be seen to be doing a cosy deal. But there was a clear danger that Pessina
had Alliance Boots over a barrel: if his bid collapsed, the company would be
left with a clearly disgruntled executive deputy chairman.
KKR was persuaded to lift its offer to £10.40 a share — and Alliance Boots
agreed to open its books. But to make sure that shareholders didn’t feel
short-changed, Rudd wanted a proper auction. As he delicately put it at the
end of last week, “a bit of competitive tension over price is a good thing”.
Two-and-a-half weeks ago, on a Thursday afternoon, Rudd got what he wanted.
Terra Firma, the private-equity group headed by Guy Hands, entered the fray.
Hands wrote to Rudd and said he planned a counter-bid. He had advisers in
place: Lehman Brothers, Gleacher Shacklock, and Avington Financial.
And within seven days, Hands had garnered the support of banks, including
HBOS, which pledged both borrowings and equity, and, crucially, the £13
billion Wellcome Trust. Rudd had the competitive tension he wanted.
For both KKR and Terra Firma, the race was on to collect the information they
wanted about Alliance Boots to underpin a firm bid. KKR was already well in
the lead: after all, it had been studying Boots since the start of the year,
and it had already been given access to Alliance Boots’s books.
And by the time the Alliance Boots directors convened last Thursday evening,
they knew what was on offer. Guy Hands had met Rudd two days earlier and
made an indicative bid — an offer hedged around with a string of
qualifications — at £10.85. But KKR was in a position to make a firm offer.
To win the Alliance Boots board’s backing it had to top Hands. And it did
so. KKR offered £10.90 a share — some 35% higher than the average value of
the stock in the month before KKR’s interest became public.
It was high enough. Alliance Boots’s board agreed to recommend the deal. Then,
throughout the night, Boots’s teams of advisers led by Simon Dingemans of
Goldman Sachs and including Greenhill, Credit Suisse and UBS, slogged
through the minutiae of the deal. By six in the morning, everything was tied
up. Rudd was telephoned to be told that an announcement could be made when
the stock market opened.
Cazenove tried to buy Alliance Boots shares in the market. But already
investors sensed that there could be more to be had. Hedge funds piled in.
Within minutes, the share price was above £11. And Terra Firma had to make
sure KKR did not bolster its position by buying shares to add to Pessina’s
15% holding.
Shortly before 10.30 am, Hands’s firm issued a statement to up the ante. It
said it had submitted a new offer — again only indicative — signalling that
it might bid as much as £11.15. Terra Firma pointedly said that it would
have gone as high as £11.26 a share if the Boots directors hadn’t agreed to
pay KKR a £100m “break fee” if they withdrew their
recommendation. Rudd said sniffily: “Talk is cheap. I want a firm bid on the
table.”
Hands’s team will open talks with the Alliance Boots board on Tuesday and will
start a close examination of the company’s books.
Last Friday, as Alliance Boots’s share price climbed, Rudd smiled as he read a
text message on his mobile phone, sent to him by one of the company’s
stockbrokers. “Institutions delighted at your achievement,” it said.
And how did it feel to be the first FTSE 100 chairman to preside over the
likely private-equity takeover of his company? “I certainly don’t feel
elated about it,” he said. But at least he could say that he did his best
for shareholders.
THE saga of Alliance Boots is not over yet. German-based Celesio, owner of the
1,300-store Lloyds pharmacy chain in Britain, indicated its interest in
being involved in a bid, but now seems to be out of the running. Hands and
his backers, however, appear determined to make a fight of it — although
Pessina has indicated that KKR is the only private-equity bidder he is
prepared to work with.
No matter which private-equity group wins the day, it is likely to attract
opprobrium from those who regard Boots as a British institution that should
not be messed with.
Retail experts warned last week that a private-equity buyer could indulge in
“opportunistic financial rape”, stripping the company of its assets and
selling it on within a matter of years.
Richard Perks, director of retail research at Mintel, the market-research
group, said he believed both bids would involve some form of asset-stripping
and could result in big job losses to cut costs.
Paul Maloney, senior organiser at the GMB union, said private-equity ownership
meant “danger all the way”. He said the union had identified 113 Boots
branches across the country that were in danger of being closed under new
ownership.
The union has written to health secretary Patricia Hewitt asking her to look
into the financing of any private-equity takeover. But Sam Hart, an analyst
at Charles Stanley, said he did not think a private-equity bid would lead to
big changes. “It’s very difficult to speculate, but my gut instinct is that
things will continue along the same lines, particularly if Pessina’s bid
succeeds.”
Richard Ratner, retail analyst at Seymour Pierce, said he expected things to
be no different for the public: “The [new owners] have to make the business
profitable, and that depends on the customer.”
There could still be a twist in the tail. Neither bidder has yet reached
agreement with the trustees of the Boots pension fund. “The pension scheme
trustees are the kingmakers,” said John Ralfe, an independent pension-fund
trustee and a former head of corporate finance at Boots.
If KKR wins the battle of Boots — even if it has to push its offer higher —
questions remain about the future of the business and who will run it.
Pessina has clear ambitions to expand the business. And he reckons that
Alliance Boots’s existing business can be reshaped more quickly than would
be possible in the public arena.
He has indicated that chief executive Richard Baker — a man who has done “a
brilliant job” according to Rudd — would stay with a privately owned
Alliance Boots. Outsiders are less sure. It is widely known that Baker and
Pessina have had their differences over the past few months.
Pessina is laughing. If the KKR bid goes through, he will bank £500m, reinvest
about £1 billion in the group and hope the value grows over the coming
years. And if Hands emerges victorious, Pessina could simply sell
everything. His potential takings: £1.5 billion.
How it all began 158 years ago
1849: John Boot sets up the British and American Botanic Establishment,
selling herbal remedies in Nottingham.
1877: Jesse Boot takes over the running of the store from his late father. Six
years later he registers Boots as a limited company.
1892: A flagship store is opened in Pelham Street, Nottingham, after Jesse
Boot spends a decade developing a shop network.
1920: The firm is sold to America’s United Drug Company.
1933: The parent company collapses during the Depression and Boots is sold
back into British hands. The same year it opened its 1,000th store.
1935: Boots launches its No7 cosmetics range, which becomes hugely successful.
1936: Boots makes its first foray overseas, opening an outlet in New Zealand.
In the ensuing decades, it has at times been in America, Canada, Japan,
Taiwan, Italy and the Netherlands.
1938: A group of retail pharmacists bands together to form Unichem
1977: Stefano Pessina sets up the pharmaceutical wholesaler Alliance Sante in
his native Italy.
1983: Optrex, the eye-drops brand, acquired by Boots to add to a growing
stable that included Soltan sun lotion and Nurofen painkillers. Other deals
followed, such as the purchase in 1986 of the company behind Farley’s rusks.
1989: Boots launches a £900m takeover bid for Ward White, a retail
conglomerate that owned brands such as Halfords, the car-parts chain. The
acquisition was not a success and the various chains were subsequently sold
off.
1997: Alliance Sante merges with Unichem to form Alliance Unichem, a
pharmaceutical giant in which Pessina is the largest shareholder.
2005: Boots sells its stable of healthcare brands to Reckitt Benckiser, the
consumer-goods company.
2006: Boots shocks the market by announcing a £7.5 billion merger with
Alliance Unichem in July. Shares in the new company start trading on July 31
as Alliance Boots.
2007: Pessina teams up with Kohlberg Kravis Roberts to launch a £10 billion
takeover bid for Alliance Boots.
