Boots v Sainsbury
Any day now Alliance Boots will succumb to a takeover bid from a private-equity fund, probably KKR in partnership with Stefano Pessina, rather than Guy Hands’s Terra Firma with the Wellcome Trust.
When that happens we’ll be able to run a useful experiment about whether private equity is a good or bad thing, because we’ll be able to compare the performance of Boots against the one that recently got away from private equity, J Sainsbury.
The two companies have a great deal in common:
1) They’re both worth about £10bn.
2) They both face intense competition from Tesco and Asda (though obviously in different parts of their respective businesses).
3) They are both about mid-way through a recovery programme having endured years of decline.
4) They are both run by executives from the Mars stable, Justin King at Sainsbury and Richard Baker at Boots.
5) They both have strong brand names and powerful market positions.
However quite soon there will be a couple of big differences between them. Boots will become much less visible than Sainsbury. It will be able to reconfigure and develop its business without the requirement to keep thousands of investors and the media informed of its every move, its every success and its every ailment.
Broadly, the owners and managers will feel liberated to do more or less what they like.
And those managers will be feeling pretty chipper. They will have cashed in for many millions in aggregate their current incentive packages and will be loaded up with even more generous incentive packages.
The contrast with Sainsbury could not be more stark. There the top tier of management have just suffered a double whammy. Unlike their peers at Boots, they’ve had a magnificent windfall on their current performance packages dangled in front of them and then snatched away; and they’ve dreamed of becoming immensely wealthy in partnership with new private-equity owners only to see those new owners gallop off.
In a way, the different plights of the two companies can be put down to two billionaires, each of whom has a strong emotional attachment to one of the businesses: Stefano Pessina, who created the Alliance bit of Alliance Boots, a pan-European network of healthcare retailers and wholesalers; and Lord Sainsbury, who was chairman of Sainsbury till becoming a minister in Blair’s government and who scared off the putative private-equity bidders for Sainsbury by saying he wouldn’t take less than £6 a share for his substantial stake.
Pessina wants to take Boots private because he believes it’ll flourish away from the hurly burly of the public markets; Sainsbury, whose record as a manager of Sainsbury was not superlative and whose trustee sold a load of his stock at prices well below £6, is pledging his faith and a substantial part of his fortune to the status quo.
Which of these two would you back to win? The outcome will have quite an impact on whether the shift from public to private ownership turns out to be a cyclical or a secular phenomenon.
The board of Boots has recommended a takeover offer from one of the world's largest private equity firms, Kohlberg Kravis Roberts.
The offer is £10.90 per Boots share, which is a bit more than investors had been expecting.
It values the leading healthcare retailer at £10.6bn.
The deal would be by far the largest acquisition ever made in the UK by a private equity firm.
It will be highly controversial, following the recent campaign by trade unions and MPs on the left of the Labour Party claiming that private equity takeovers lead to savage job cuts and excessive rewards for the executives in private equity firms.
Boots's board has said yes, because KKR has improved its offer a fraction from what it originally offered.
The deal would be enormous in terms of its impact on people. Boots employs more than 100,000. Millions of us trust its pharmacies. And its wholesaling operation is a huge supplier to the NHS.
So takeover will reignite the debate about whether ownership by private equity is good or bad for British companies.
Unions are bound to complain that there'll be job insecurity for Boots's staff and fat profits for KKR.
Whereas the company's deputy chairman, Stefano Pessina - who's in partnership with KKR - will probably argue that Alliance Boots's prospect for growth would be better as a private company - sheltered from the interference of shareholders and the media.
Terra Firma's higher offer is conditional on inspecting Boots's books - and is therefore not a firm offer. For that reason, Boots's board is under no pressure to recommend it.
Terra Firma's motive for making the announcement is to drive up Boots's price in the market. It is prepared to pay an effective £11.15 - viz £11.26 minus the break fee (seminar on this to follow).
This prevents KKR from going into the market to buy stock as under takeover code rules a bidder cannot pay more for stock in the market than the value of its offer.