大象传媒

KKR and competition

• Robert Peston
• 30 Mar 07, 11:00 AM

independent directors were fearful they had boo-booed when rejecting an earlier indicative takeover offer of 拢10 a share from and Stefano Pessina.

They and their bankers have subsequently calculated that a tenner is pretty close to fair value for the shares, on the basis of Boots鈥檚 strategy and prospects. So the directors would have looked pretty fair plonkers in the City (though probably not elsewhere) if the bidders had walked away.

But they're out of jail: KKR and Pessina are back with 拢10.40. It means that Boots's long history as a listed business is probably almost over. My prediction is that it will soon be owned by private equity - probably by KKR/Pessina, or just possibly by one of the other private equity firms mulling a counter-offer ( and are the supposed rivals).

I've written a few times about why this takeover matters and why not everyone thinks it's a good idea. And although I think it will go through, I鈥檝e uncovered one possibly serious obstacle to completion of the deal: the competition authority, the .

Bear with me here, because the reason for a possible OFT intervention is not straightforward.

Item one: a few years ago Sainsbury gave preliminary consideration to a . What I鈥檝e discovered is that it sought guidance from the Office of Fair Trading about whether the competition issues would be serious enough to prompt a reference to the Competition Commission. And the OFT gave confidential guidance that a reference to the Commission of a Sainsbury/Boots combination was highly likely.

Item two: Sainsbury and Boots are not at this time contemplating a merger. But KKR wants to buy Boots. And it is also part of the consortium that wants to buy Sainsbury. If it succeeds, both Boots and Sainsbury would become part of the KKR empire (though KKR would of course argue that they would be managed wholly separately).

Item three: It is by no means certain that the consortium of KKR, , Blackstone and will eventually table a formal offer for Sainsbury. That depends on whether the trustees of Sainsbury鈥檚 pension fund demand that the consortium injects close to 拢500m into their fund (in which case a bid at a price acceptable to Sainsbury鈥檚 board is likely to be tabled by the consortium) or whether the injection would be 拢1bn (where it becomes harder for the consortium to make the numbers work).

Item four: I鈥檒l wager that a formal bid by the KKR consortium for Sainsbury is eventually tabled.

Item five: If both bids were to succeed, KKR would become a powerful owner of two companies with substantial shares of the UK retail healthcare market, Boots and Sainsbury. The OFT would need to look at the deals very carefully and might well refer them to the Competition Commission for lengthy scrutiny.

Now I鈥檓 not saying there will be a reference to the Commission. There are too many hypotheticals for me to be confident of that. But there is a genuine question about whether KKR should be able to purchase the ability to exercise significant influence over two competing companies with strategically important positions in the important markets for healthcare, pharmaceuticals and toiletries.

UPDATE 07:48 31/03/2007 I'm away for a couple of weeks and won't be writing new commentary for Peston's Picks till mid April.

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