Why the Boots bid matters
has 3,000 outlets, including 2,600 in the UK. It employs more than 100,000 people. As a drugs and medical consumables wholesaler, it has an impressive 40 per cent market share, supplying more than 125,000 pharmacies, health centres and hospitals. And its pharmacists frequently dispense valuable healthcare advice along with the drugs.
All of which is to say that this company touches most of our lives from cradle to grave and what happens to it isn’t just of interest to its shareholders. And if it were damaged by a private-equity takeover (by, for example, being over-burdened with debt payments), many of us would care and some of us would be inconvenienced or indeed harmed.
Which is also why Boots will be a great test case for whether private equity firms mean what they say when committing themselves to being more open and transparent about what they do.
As I wrote on Friday, I’d expect the great pioneer of the global private equity industry, (KKR), to end up as owner of Boots, in partnership with the billionaire deputy chairman of the retailer, Stefano Pessina.
The £10bn-ish they’ve said they’ll probably offer is well above where the shares were trading only a few days ago and will be impossible for Boots’s board to dismiss out of hand. And endowed with the 15 per cent of the shares controlled by Pessina, they’ve got an important head start as and when they formally slap down a bid on the table.
However I certainly don’t expect the Boots board – which meets today – to roll over immediately. That’s not the style of the chairman, Sir Nigel Rudd. But if he can squeeze a bit more out Pessina and KKR, then the chances are that Boots will be theirs.
Now Pessina’s formidable track record is as a builder of businesses. And my understanding is that he was motivated to team up with KKR by what he perceived as the short-termism of the City, his perception that investment analysts were chronically undervaluing the prospects for Alliance Boots and unduly obsessing with superficial measures of its progress (such as so-called like-for-like sales figures).
All of which would imply that this takeover would be one where private equity intends to buy to invest and build and grow, as opposed to the bogeyman caricature of private equity firms as asset strippers and grim reapers who chuckle as they decimate staff in underperforming businesses.
But that’s my assumption, based on one brief meeting with the elusive Mr Pessina many months ago and my assessment of his history. If KKR wants this bid to be the rehabilitation of the UK’s relationship with private equity, it should be explicit about what it means for customers (not just you and me, but hospitals and independent pharmacies too) and for those 100,000 employees.
Whether KKR ends up as the owner of Alliance Boots will be determined by shareholders and bankers. But if KKR wants to build a formidable, sustainable business in the UK, it will have to reach out to a wider constituency than investors and providers of finance.
As for Boots’s current shareholders, they should be embarrassed by this takeover attempt. Why? Because Pessina plainly believes they’ve failed to provide the support necessary for Boots to flourish – which would be damaging for the millions of us who own Boots shares through our pension funds.
Update 15:30 GMT: The Boots board, as predicted, has decided £10 per share isn’t enough – and therefore the independent non-executive directors can’t recommend an offer from KKR and Pessina at that level.
The ball is therefore firmly back in the court of KKR and Pessina. They would look pretty foolish if they simply walked away. So I would therefore expect that when they search down the back of their sofa, they will find that they actually have a few hundred million pounds more they could spend on buying Alliance Boots.
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I am not convinced by your supposition "If KKR wants this bid to be the rehabilitation of the UK’s relationship with private equity".
Your wording is far too loose for serious journalism. The rehabilitation of relationships you refer to is prompted by recent media coverage, instigated by government and the treasury, who want to find a way of putting an industry in the dock so that they may fill a budget hole by levying more tax on it. How this is in the best interests of the UK is rather obscure. After all many pension funds, and therefore pensioners, are very active investors in private equity funds.
So far as I can see the UK has had a successful and growing relationship with private equity for more than 40 years - spawned, amongst others, by Investors in Industry (now 3i) a company itself originally formed by a partnership between the government and leading commercial banks. A fine example of government using a small amount of public finance in a private/public partnership to raise in turn billions of tax revenue.
I suggest you research the economics of your article far more thoroughly than your superficial political analysis. If nothing else your focus on one deal is narrow minded.
What is wrong with "decimating staff" if the business is under-performing?
Businesses should not employ staff to reduce unemployment figures but to be productive. If they are not productive, they should be employed elsewhere instead.
How many staff would be decimated in the public sector or the Ö÷²¥´óÐã if private equity firms were given the chance to cull non-productive staff!?!
Boots was started in Nottingham and is part of the Cities identity. I am concerned that the company will change beyond all recognition and all we will have left of Boots (a major employer in the area) will be another historical landmark. The company is beginning to get back on track with great customer service, new brands and good stocks. Part of me encourages a certain amount of diversity and growth and this venture by KKR may be good for Boots but I have this thought that keeps nagging at me when I become enthusiatic about the changes and it's this: At What Price? I hope it doesn't just come down to that but in the end it always seems to and I suppose has to.
I am not employed by Boots but suprisingly it means alot to me and has always been a part of the community in Nottingham. For the cities sake I hope it does well, and stays put, whoever owns it.
OK this will sound really naive, but I just don't want Boots to change. I use their pharmacy a lot and find their pharmacists more willing to help than those at other stores. And Boots has one of the most generous loyalty card schemes on the High Street. I've always found their staff to be cheerful and -an unusual asset these days- polite.
I used to work in the City years ago, and I can remember the sort of excitement this news might cause. I just hope that more than money is thought about in the decision-making.
As I warned above, quite naive of me, I know.
The media and second rate politicians are chasing cheap headlines by this constant debate over private equity, your premise which seems to be Boots is a company that effects of our lives it's therefore better that’s it not owned by a private equity partnership is absurd. You are swapping one set of institutional shareholders for another set of shareholders, the pension fund you say that is invested in Boots is just as likely to be invested in KKR. Boots will still be subject to exactly the same regulatory oversight as publicly listed business or a privately owned one.
The real debate which you touched on is how can we allow the management of publicly listed firms to take the long term strategic decisions that allow private equity firms to create so much more shareholder value than their listed counterparts.
Snafu shows one of the reasons that private equity is regarded with suspicion - they have no responsibility to the wider community, only themselves. They, and all companies, DO owe a duty to keep people in employment, and not use a narrow, money-centred model of efficiency. Self-centred capitalism helps no-one.
Boots is ripe for revamping as my experience, as the lauded customer of your journalist's commentary, is one of inefficiency, ill informed staff, badly laid out stores, and people working for the company who are more concerned with not working too hard than bothering to offer services to customers. Prescriptions are given out as we are automatons, the optical side is awful in more than one branch in my experience, and it is easier to get a reply from 10Downing Steet on an issue than it is to get hold of Boots regional management.
Poor and/or complacent senior management are at fault here and if Boots is to be bought to be shaken up significantly, all to the good as I suspect customers will benefit. Pity the shareholders weren't able to oust existing senior, again complacent, amangement long ago.
For a journalist you are rather emotional and obviously do not frequently do any shopping in the stores.
This article seems to start as if the premise has been accepted that private equity is "bad", and somehow needs to redeem itself. This is not the case. The negative press has been fairly recent, and largely driven by the GMB Union who are on a revenge mission after being de-recognised as the union of the AA. Couple that with a political motivation of many traditional unions that capitalism itself is bad and they simply have a major axe to grind, and are not themselves being sufficiently challenged in the media on their very flawed reasoning.
We should instead judge each case on its merits, and there have been as many positive facts as negative that have emerged in what is still a young debate. I note lower down that the author questions whether a 3 year outlook is sufficient against overseas competitors. Perhaps not, but having worked in a number of public listed companies, I can say with some certainty that whatever their public rhetoric, many of these are working on only a 1 year outlook as they seek to ensure analyst expectations for the current trading year are met in order to protect the share price. The level and detail of planning that goes into private equity operations over a 3-5 year lifespan is in my own experience considerably greater than any comparative in listed companies. Don't forget as well, that when the private equity firm seeks to exit, they will need to ensure they can demonstrate sustainable and growing profit streams in order to justify the price they seek, which itself will be subject to scrutiny of due diligence from an experienced buyer. To achieve this, the company itself will still need to be thinking beyond the bounds of the exit period - and to assume that there is some mug out there who will pay a high price for a business that has just been run on a short term "sweat the assets" basis is an outdated concept.
have to agree with those who have posted so far. Why do we get this lefty approach to business espoused on here that accepts as its starting point that a group aiming to make a profit must be bad for society.
Successful businesses are good for society. Let us not follow the Rover approach of throwing good money after bad because some how people think businesses should be obliged to provide Communist-style unlimited employment even if the business doesn't need it.
I suspect that getprg doesn't really get that when Robert talks about "UK", I feel that he's not talking about "UK plc". What positive experiences of private equity would the person on the high-street be able to point to in their life?
I'm not saying that there aren't any but let's not assume or allow the focus of private equity discussion to be about the city.
If PPK can show that Private Equity can develop and really bring out benefits for Boot's consumers (which as Robert shows affects a huge number of people in many varied ways) then that would do a lot to show what kind of private equity involvement people (in the main) want to actually see.
I think nothing wrong with private equity, we always have concept of Business Angels and VC(s) for start-up and small companies, which is relatively successful than high street business bank manager is giving advice on how to run business.
So what wrong, if experienced and successful businessmen now eyeing for big companies, I think they will better mange firm rather than going thru scandalous M&A process. The fundamental criticism on private equity isn't acceptable. The industry is a important part of the economy and generates wealth and jobs not just for the senior managers, but for the all employees and the pension funds and insurance companies that invest their savings.
I currently work for Boots, and the debate on here has some well informed comment and some equally poorly informed comment.
The fact is that Boots the Chemist has been starved of investment for many years and was used as a cash cow under the disastrous Steve Russell tenancy.
If the intent is to invest to grow, then everyone wins.
A business does not exist to create employment, however a company like Boots is nothing without the people employed by it. If, for example, the pension benefit was significantly altered, I can guarantee an exodus of key staff, vastly reduced customer service and a damaged business- bad for all.
The overwhelming majority of Boots staff are hard working and efficient/ effective. I can assure all, that there is very little fat in the organisation with staff goodwill providing many "free" hours.
> Snafu shows one of the reasons that
> private equity is regarded with
> suspicion - they have no responsibility
> to the wider community, only
> themselves.
Not just them. All the wimps in my
school went into business, instead of
a masculine profession. They are
greedy because of their insecurity.
> They, and all companies, DO owe a
> duty to keep people in employment,
> and not use a narrow, money-centred
> model of efficiency. Self-centred
> capitalism helps no-one.
Perhaps. I want to the bosses of the
companies I part own to get the
workers to do their best at the
lowest cost to me. Others can worry
about the big picture, I'm too busy
making money (or trying to, despite
these sudden downward lunges in the
market).
I seem to recall at the time of the merger being reported, Mr Pessina had said he had been a long term admirer of Boots (the Brand) and that he had hoped one day to own it.
It appears now that having got his boot in the door through the merger to create AllianceBoots, he is now using his large stake in the company to take control.
Don't get me wrong Unichem and AllianceUnichem were much admired companies and seen as slicker enterprises than the Boots monolith, but is this a step to far? A merger of equals or a (somewhat delayed) reverse takeover .
I was an auditor of Alliance Unichem before the merger. Kenneth Clarke was Chairman, very weak Uk management and the business was in the hands of Unichem and Italian maangement whose business practices would have been very challenged by the UK audit regime of today. However, they got away with their Italian business practices. This move is nothing more than Italian management taking the business back behind the curtain and out of the glare of a public quoted company where grey market practices that bedevil European pharmaceutical retailing can prevail. I would not be surprised if the Board have started to get a sniff of this and see this as an honourable way out.
It will be the end of final salary pensions.
I have been following this with interest as i do work for Boots on there main site in Nottingham and the general feel that i get from all my colleagues is that we will be finally taken over by KKR. This has caused us to be very unsettled and nervous as we believe that the company will be asset stripped, which is a shame because i am sure Boots is seen as one of the countries major brands not just in this county but worldwide. On another note I very much disagre with 'Mo's ' comments, the people i work with work extremely hard and are very committed in everything they do, we may not be the face of Boots but we all know that in what ever we do we are an integral part of the company and all of our day to day actions affect what happens in the shops.
A slight aside to correct the impression that the media has created this negative impression of private equity. As BastondeBelfry points out this latest media storm is in part created by the unions, in part by rumours of Gordon Brown reviewing the tax breaks, and in part by the economics of over leveredging management buyouts. To blame the media is to attribute it too much power. The media reflects, it does not create.
Peakcrew and Steve Jones, private equity's responsibility to the wider community is offering goods and services that people value and want to buy!
I assume you are both happy to pay more than you should for all your purchases!
Has anyone actually been into a Boots recently? If one can even find the position where your prospective purchase is supposed to be, the product will be one of the many contributing to the gaping holes across all their shelves.
Boots used to play an integral part in bringing up a child, but my experience with my eight year-old son is that far from being the single stop shop that it should be, there are many other places, including supermarkets, that are more likely to meet all your needs. Having started with an attitude that was generous (and probably shared with the majority of people in their forties who remembered and believed in Boots' reputation), it was with reluctance that I had to conclude that it was appallingly run.
But nor is it just the logistical problems (for which no one but the management can take the blame). Every one of the series of initiatives that they have taken has ended in failure. The idea of spending millions on Aromatherapy and the like was misconceived. The opticians have hardly shone and the way is being shown by the likes of Specsavers. Their loyalty card failed and was withdrawn I beleive (or at least severely curtailed in its usefulness) and looked like nothing more that an exercise in getting a mailing list. The Unichem merger looks to be going the same way, yet the blame seems to being shifted onto the City whom I can only assume have looked at the basics of retailing.
My final reason for having given up on Boots is that it is no longer an attractive shop to walk into. Go into the Queensway shop on a Saturday and you will find more security guards than members of staff. One might see this as pragmatic in Bayswater, but should the shops in Shaftesbury and Salisbury also be teeming with security? If other shops with far more valuable stock can make themselves welcoming, they so can Boots.
My prognosis: This is yet another move that will have no beneficial effect for the customer and may even signal the end of Boots as a British "institution" in the nation's hearts. But, if I were a shareholder, I would take it.
I too follow this with interest...having worked for Boots for 16 Years...I am really concerned that the company we know and love will be lost in the ambition of Mr Pessina...As for Boots touching peoples lives, I care passionatly about my company, it is not just another place of work and most that have been here for any length of time will agree.
I also wholehartedly agree with James, that most people I have come across are very hardworking and committed to our customers.
I just hope our Board make the right decision....
Andy Newport (post 15) - I hope you are not suggesting that Deloitte's didn't do their job properly?!?!
Well well well - I'm sitting on a cloud watching all of this (my life's work, that is) at the centre of a takeover bid. My ethos was always to be the biggest, best and cheapest with branches everywhere. I was thrilled with the merger as it gets my Company closer to my vision. As a guiding voice from the past my view is - to the City, belt-up me duck and give us a break! - to Stephano & Ornella, ship out, how can you be trusted now! - and to the all the staff and senior management at mine, stick to your values, remember your heritage and don't let yourselves or me down!!
It's too important to let it go & this is bigger than £ signs.
Forever watching, trust Jesse
If Boots is taken over, will the money invested in the Final Salary Pension Scheme be safe? Or can they asset strip that? I'll be 50 in a few weeks' time, in no position to retire but may be able to withdraw the funds and invest elsewhere if a new owner may be able to raid the fund.
A worthy well-balanced article. Sad to say, the notion of paternal capitalism disappeared with the Victorians. Rather than build homes, hospitals and libraries for the workers, modern management buy villas, forests and islands for themselves. Although it's difficult not to be uneasy about this bid, Boots management have hardly been blame free in recent years. When the dentistry/in-store clinics idea came along nobody within the staff ranks thought it was worth even looking at - and yet the bosses took the decision to blunder in yet they still took their bonuses when the whole kit and kaboodle floundered. Twas ever thus...
As an ex-employee who 'grew up' at Boots - having worked there for 30 years, I have very mixed feelings over the current take-over bid. Whilst always happy to embrace change and generally see the positive side in new ways of doing things, I cannot help but feel that a take over will wipe away the very essence of what Boots stood for over many years in this country. I have read with amusement some of the remarks about the staff being inefficient - in my experience ex-Boots staff are very well regarded in other organisations, and I certainly had no problem in being 'snapped' up when I was made redundant. My current employer actively seeks ex-Boots employees believing them to be of very high calibre. So, don't believe everything you read in the press!
richard baker who or what is he easy option for a big pay out its lucky we as front line people on the shopfloor believe we have a company a company worth working forgillian rowlands store 1003 newport isle of wight
There is a shop right next door to our local Boots store called "Savers" nearly everything in there is half the Boots price, or more.
They've been ripping people off for years.
They deserve all they get.