LONDON (Reuters) - Private equity firm Kohlberg Kravis Roberts defeated rival Terra Firma with a $22 billion bid in their battle for Alliance Boots on Tuesday, clearing the way for Europe’s biggest leveraged buyout.
KKR, with the support of Alliance Boots deputy chairman and biggest shareholder, Stefano Pessina, upped its agreed bid for Britain’s biggest pharmacy chain for the third time, to 1,139 pence a share, or 11.1 billion pounds.
The bidding victory opened the way for KKR to stage the first private equity takeover of a FTSE 100 company and Europe’s biggest leveraged buyout. Boots shares fell on the news Terra Firma had shelved its plans and the prospect of a bid war had evaporated.
KKR trumped an indicative bid of 1,126 pence a share, or about 10.9 billion pounds ($21.8 billion) in total, from private equity rival Terra Firma and its partners medical charity Wellcome Trust and banking group HBOS, who issued a statement withdrawing their bid proposal.
“Boots is a critically important national institution, and we are naturally disappointed not to be able to execute the bold vision we had for the company and its critical role in the provision of healthcare in the UK,” the Terra Firma consortium said.
Alliance Boots’ board said it would recommend the KKR consortium’s new offer, which was up from a previously agreed deal of 1,090 pence per share. Analysts saw little chance of another bidder emerging to derail the deal.
“It’s in the final chapter now. Terra Firma would have had to have bid at 1,150 pence per share and that was too high for outsiders to the group. KKR and Pessina look set to do the deal,” Bernstein analyst Luca Solca said.
KKR and Pessina’s move follows a failed private equity bid for Britain’s third-largest supermarket group J. Sainsbury two weeks ago.
It puts Boots’ 3,000 retail outlets, including around 2,600 UK pharmacies, health and beauty stores and optician practices within their grasp. The company also operates 380 distribution depots across Europe and recently expanded to China.
KKR said late on Tuesday that it had acquired a further 30 million shares and now holds a stake of about 13.6 percent in Alliance Boots. With Pessina’s 15 percent stake, that means its consortium now controls almost 29 percent of the company shares.
The stock closed down 0.5 percent at 1,121 pence, after gaining 40 percent in the six weeks since KKR and Pessina made their first bid proposal of 9.7 billion pounds on March 9.
Boots five-year CDS traded 5 basis points tighter on the day at 167.5 basis points, according to Deutsche Bank.
“It could trade around here for a while until the financing structure is announced,” a trader said.
Private equity has faced criticism from unions and some politicians in Britain in recent weeks with its executives accused of asset stripping for financial gain.
Pessina rejected those accusations in a telephone interview and said he and his business partner KKR planned to create “significant jobs.”
A nuclear engineer by training, the Italian tycoon turned his family’s Naples drug wholesaler into UniChem and then masterminded the merger with Boots. He ranks 407th in Forbes’ latest list of the world’s billionaires with $2.3 billion.
“I would never accept working in a business if we have to strip out part of the business or to break it up or if the main goal isn’t the growth of the business. Growth of course means more people,” he told Reuters.
Pessina has said he plans to unveil an extensive investment and expansion program, running into billions of pounds, should his bid succeed, and is looking international acquisitions in the pharmacy and wholesale business as well as organic growth.
KKR said its offer was inclusive of any final dividend to be declared in respect of the financial year ended 31 March 2007.
The new offer values Alliance Boots at 24.4 times 2007/08 forecast earnings, a premium to the UK food and drug retail sector .FTASX5330 average of 21.6, Reuters Estimates showed.
KKR and Pessina are advised by UniCredit, JP Morgan Cazenove and Merrill Lynch. Goldman Sachs and Greenhill are acting for Alliance Boots, and Lehman Brothers and Gleacher Shacklock for Terra Firma.
Additional reporting by Deborah Haynes, Anshuman Daga, Eleanor Wason, Richard Barley, Maya Thatcher, Mark Potter, and Mike Elliott