STEFANO PESSINA looks remarkably relaxed for a man who has to deal with a £7
billion debt after cementing Europe’s biggest private-equity buyout – the
£11.1 billion takeover of Alliance Boots.
At 65, many lesser mortals would be relaxing in their holiday homes and
improving their golf handicap, but Pessina will be working night and day to
find ways of improving efficiency and cashflow at the chemist chain to pay
back its huge borrowings.
The annual interest bill is expected to be around £600m – only slightly less
than the £630m Alliance Boots is expected to make in annual profits. With
such thin interest cover, the transaction looks risky, but Pessina was all
smiles and laughter last week as he defended the deal with a passion that
rose above his broken English.
As Alliance Boots’s biggest shareholder, with a 15% stake, his holding will be
worth £1.6 billion after the deal, which is backed by KKR, the American
buyout giant, and an army of investment banks. But he has pledged to keep at
least £1 billion of his money in the future company.
“Do you really believe that if I perceived this deal was risky I would have
done this and put at risk a company I have been building for years and £1
billion of my personal wealth?” said Pessina. “I live in Monte Carlo, but I
seldom go to the casino. I just go to the restaurants. I hate gambling. I am
a very rational man.”
Pessina, born to a well-heeled family in Milan, has tried to shrug off the
pressures associated with a takeover to which so many superlatives have been
attached. It is the biggest leveraged buyout in Europe and the first time a
FTSE 100 business has been taken private.
“Big deals are a relative concept. The merger of Alliance and Boots was a big
deal. The merger of Alliance and Unichem was a big deal. For KKR this is
just business as usual,” said Pessina, patting the arm of his new business
partner, KKR’s Dominic Murphy. “KKR has been doing leveraged buyouts for
more than 30 years, I have done my business for the last 30 years. I am
still alive. He is still alive.” He grabs Murphy. “We are good operators and
we have combined our expertise.
“I look at these things in a very cold way. It does not elicit any emotion. I
think of it before I do it and then when I do it I try not to be emotional.
I am not even happy just now. I am tired.”
The extraordinary takeover battle saw KKR and Pessina table offers in a
bidding war against Guy Hands’s Terra Firma. The net result meant KKR and
Pessina had raised their original offer by more than £1 billion, lifting
their price from £10 a share to £10.40 to £10.90 to £11.26 and eventually to
£11.39. The price was all the more surprising given that many City analysts
had recommended selling the stock at £8.
“We entered with £10 a share thinking it was a fair price,” said Pessina, but
he acknowledged he was “psychologically prepared” to raise the offer. “At
£10.90 we thought that was a very full price, but we were not shocked when a
new offer came in – we just knew it was a very full price,” he said.
Pessina insisted that his con-sortium proceed with a knock-out bid to protect
the company. “If we had continued with this uncertainty, the company could
suffer. This is the last thing we wanted,” he said.
KKR’s arch rivals in London were this week cheekily toasting Hands for being
instrumental in forcing KKR to pay more.
Pessina is full of praise for the way Sir Nigel Rudd, the Boots chairman,
handled the bid battle. “He has been fantastic in this. He has been very
calm and tried to act in the best interests of shareholders.”
Pessina shrugged off all the criticism that he was creating conflicts of
interest by working as a major shareholder and with one of the bidders. “I
believe I have been reasonably fair. I don’t see this conflict of interest,”
he said.
In the past few days Pessina has been telling colleagues at Boots that now is
the time to knuckle down to business again. He insists that he is keen to
carry on working with all the key executives at the company, including
Richard Baker, the chief executive. “Richard has had to dedicate a lot of
time to the formalities of operating in the City, but now he and the team
will be freer to concentrate on running the company. I see no reason to
change the team,” he said.
Ornella Barra, a board director and Pessina’s girlfriend, will also stay with
the company.
Pessina’s plans centre on international expansion – taking the group’s
pharmacy business into China and other developing countries. In western
Europe, he wants to be able to move quickly when markets are deregulated.
New services will be introduced at existing pharmacies as they shoulder more
of the responsibility for providing medical advice that would once have been
given by doctors and nurses. In Britain, Boots stores need refur-bishment.
Across the business improving profit margins will also be crucial – perhaps,
analysts speculate, by extracting better terms from suppliers by offering
longer-term contracts.
“We are living in a world where the pharmacy model is changing. We have to
invest to adapt the structure,” said Pessina.
He insists it is not impossible to implement this strategy in the public realm
– but it takes longer. “If you want to buy a company in an emerging market
it can hit profits in the short term. If you are a public company this is
difficult. You have to go through two or three meetings, and be very
careful, and at the end of the day someone else buys the company that you
wanted to buy,” said Pessina.
“In private the decision can be taken in two hours. A public company will have
to go softly, but that is not always in the best interest of the company. In
some markets you need to work rapidly or you can miss opportunities.
Sometimes in private you can do in three years what you will do in five
years in public.
“If like-for-like sales go down because you are investing and expanding in new
markets, the analysts say the company isn’t doing very well and the
shareholders are worried the share price is volatile and the management team
can’t work in a relaxed way,” said Pessina.
One City source familiar with Pessina’s strategy said he wants to accelerate
the growth of the business before the big American pharmaceutical giants
plough into Europe. “He cannot believe he can continue to grow in this way
and they still don’t come over. So he wants to work fast,” said the source.
“He also hates the way the analysts judge Alliance Boots against Tesco and
Sainsbury and say ‘oh you’re not growing your deodorant sales as quickly as
they are’. He thinks they just don’t get it.”
Pessina had never been a big private-equity fan. He had thought they were too
short-termist. But now he is looking forward to his new relationship with
KKR after being persuaded the firm is in it for the long term.
“Our average hold period at KKR is seven years,” said Murphy. “We believe
there are a lot of levers to pull in this business.”
But even when the company goes private, KKR and Pessina have pledged to issue
an annual review that will include detailed financial information. “Private
doesn’t mean secret – it is an attribute of the ownership, not the behaviour
of the company,” said Pessina.
KKR and Pessina have pledged that over the long term jobs at the company will
increase. But in the short term, 300 redundancies from the group’s
manufacturing arm will go ahead as planned.
According to Forbes, Pessina is the 407th richest man in the world so he is
not doing this for the money. He is doing it because he can.
Pessina has not taken a holiday since he took a two-week break two years ago.
He is planning one now – possibly at Barra’s insistence – but this is not a
man who relaxes.
When he does finally sit down to enjoy a break, you can bet that his mind will
be whirring with a grand plan to build his firm into the world’s biggest and
best healthcare business before he retires.
