KKR and competition
independent directors were fearful they had boo-booed when rejecting an earlier indicative takeover offer of £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’s 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 £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’ve 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’ve 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’s pension fund demand that the consortium injects close to £500m into their fund (in which case a bid at a price acceptable to Sainsbury’s board is likely to be tabled by the consortium) or whether the injection would be £1bn (where it becomes harder for the consortium to make the numbers work).
Item four: I’ll 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’m 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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This is Britain. We'll sell anything to anybody. There is no such thing as national interest or national pride left and there is no strategic vision.
You are right that the directors would only be viewed as plonkers by the City if KKR had walked away. But then the City is not always - in fact rrarely- the best judge of what's best for UK Plc.
Whilst the point raised over 'whether KKR should be able to purchase the ability to exercise significant influence over two competing companies with strategically important positions' is interesting, there should be little cause for concern. Firstly KKR would most likely seek to maximize possible performance of both firms and thus returns. For this to occur, particularly with two firms supposedly not operating near their full potential, it is likely would management be internally focussed. Hence a sort of chinese wall naturally occurs. Secondly that Sainsbury and Boots ar 'two competing firms' is somewhat misleading. I do not dispute the similarity of many healthcare, pharmaceuticals and toiletries products sold, but clear market differences exist. The most important distinction is that of the consumer. Boots faces a slightly more inelastic demand, than Sainsbury. The latter's competition arises from supermarkets rather than chemists, thus has to compete on a price basis. Therefore little scope for horizontal intergration (of market share) between the firms exists. Any management answerable to a supposedly efficiency seeking private equity firm should note this.
There is no question of national pride or national interest at stake here, Alliance Boots' largest stakeholder was already a foreigner, Pessina, and the rest of its shares open to anyone of any nationality to own. If a foreign owner believes it can run a British company better, creating more value per share than any analyst at any bank thought possible, then this would normally be thought of as good news for the company, its current shareholders, employees and customers.
In this case, Pessina has stated that his wish to take the company private so soon after its creation through the merger of Boots and Alliance UniChem, is to speed up the restructuring plans he always intended to carry out. Therefore what happens to the company under its new (and terribly foreign) ownership, will be no different to what was going to happen to it before the take-over.
UK companies are a very good target for possible takeovers due to the uncertainty pending over the US economy and Private Equities loaded with cash from investors. It is said that KKR has the possibility of taking over $2 trillion of assets. The latest rumours going around is that KKR may back out of Sainsbury's and focus on the Boots and possibly reach an agreement to avoid a bidding war.
Specifically on these 2 deals, the main factor that these consortiums are contemplating is the huge commercial real estate they will take control of. And following the recent trend to sell the buildings and rent them back, given the high real estate pricesprices in the UK(Gerkhin and HSBC), these two retail companies have a lot to offer.
Besides a possible intervention of the OFT in these deals, we also have to watch out for the pending case against the supremacy of Tesco, Sainsburys and ASDA in the groceries market. This market on its owns is worth about £80bn, and with Sainsbury's having about 15% market share, its goodwill solely should be worth about £12bn. And added to this the value of its real estate estimated at £8bn for its 769 stores. Do the maths and the Private Equity groups already look like a winner to me assuming they bid a similar value to that of Boots.
Yash - isn't that asset stripping?
You say that UK firms are particularly attractive at the moment because you can flog the real estate and lease it back to take advantage of high prices. This is not a great advertisement for making an investment, it is a one time cashing-in process that removes large amounts of fixed assets from the balance sheet and leaves a PE firm with a mountain of cash to pocket.
I fail to see how this is good or ever can be good for the UK or it's economy.
Look at what happended to Debm's - buildings and land sold and leased back to the company - $2 billion borrowed against assets and then allegedly paid out as dividends to the holding company. In many people's eyes this company now has a poor long-term future.
Only in the UK could this be a prospect for the company with a third of the Prescription market and another company that controls 20%(?) of the food market being controlled by short-termists...
And yet I don't have a degree in economics and so my opinions do not count, eh Yash?