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Why the Boots bid matters

• Robert Peston
• 12 Mar 07, 07:15 AM

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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