BOOTS is in advanced talks over a £7.5 billion merger with Alliance UniChem in a deal that would provide the high street retailer with its long-sought after platform for international expansion.

A successful conclusion to the negotiations, which will be confirmed to the Stock Exchange on Monday, would create one of Europe’s biggest healthcare retailers and distributors, with a total of about 2,600 pharmacies.

A deal is not expected to affect efforts by Boots to sell its Boots Healthcare International arm, which are at an advanced stage. The proceeds would be returned to Boots shareholders.

Under the terms of the proposed merger, Richard Baker and Nigel Rudd, respectively chief executive and chairman of Boots, would retain the same roles in the enlarged group.

However, Stefano Pessina, the driving force behind Alliance UniChem and a 32 per cent shareholder, is expected take a key role in Alliance Boots, as it will be called, overseeing the integration as well as strategy and acquisitions. Mr Pessina will emerge with a stake of about 16 per cent in the combined group and retain his current title of executive deputy chairman.

The revelation comes on the back of a third profit warning in seven months from Boots as it struggles with tough high street market conditions. There have been concerns that it may struggle to maintain its dividend.

Alliance UniChem’s 900-plus UK pharmacies, which trade as Alliance Pharmacies, would be converted to the better-known Boots brand, while its drugs would be distributed throughout the Boots network. Similarly, Boots would be able to sell its own products through the enlarged retail network.

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The deal will be scrutinised by the Office of Fair Trading, although the combined share of the pharmacies market will be less than 20 per cent. The companies will also argue that they are in very different markets, with Boots running larger-format stores in high street locations while the much smaller Alliance outlets operate as community pharmacies in local markets.

Although institutional shareholders generally regard such nil-premium mergers with scepticism, the companies will seek to win support for the deal by outlining its capacity to generate significant cost and purchasing synergies and boost margins.

Alliance Boots would be in a better position to challenge the dominance of Tesco.

Competition from the supermarkets has forced Mr Baker to cut the price of Boots products in an attempt to pep up tepid sales, although this has put further pressure on margins. The situation is set to worsen as the chains take advantage of the deregulation of the market to open more in-store pharmacies.

Mr Baker has talked of refocusing Boots as a “health and beauty expert” by adding smoking and weight-loss clinics and creating beauty parlours in the group’s stores. However, the City has remained unconvinced.

Goldman Sachs is advising Boots, while Merrill Lynch and Credit Suisse First Boston are the main advisers to Alliance.

None of the parties involved would comment.

HOW THEY COMPARE

Boots

Sells products in five European countries

Alliance UniChem

Drugs wholesale business

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