Back in the halcyon days of early January, I wrote a column arguing Boots was an asset more or less made for a private equity buyout. Boy, was I wrong.
In my defence, that was before the equity market meltdown, war came to Europe, debt costs climbed, growth stalled, rates started a steep rise and everyone stopped doing deals.
Then, I said the neglected overseas arm of US pharmacy group Walgreens just needed a little time away from public view for some surgery. Stores would have to be shut, jobs cut, investment made in bricks and clicks. But after that, Boots could emerge post-makeover fit for an initial public offering and a decent private equity exit.
There was a credible buyer with an inside man in the form of CVC. Partner Dominic Murphy not only sat on the Walgreens’ board but did the original 2007 buyout at KKR. Boots, I thought, would be better off for a stint in private equity ownership. The whole thing was meant to be wrapped up by Easter.
Instead, Boots has become the British symbol of how the buyout boom went bad. Of course, the turn in the private equity cycle is not a uniquely UK phenomenon. Deals are difficult to do in many markets. But in the domestic context, Boots is the sale that will demonstrate definitively just how dire things are.
It’s fitting that Boots’ last brush with private equity symbolised almost exactly the opposite. When KKR beat Guy Hands to take Alliance Boots private for £11bn, it was the peak of European private equity’s pre-crisis hubris. (This time, that honour goes to Morrisons’ sale, as this year’s struggle to sell its debt shows.)
The 2007 take-private didn’t turn out too badly for KKR, though it took them 10 years to exit. It turned out better still for Stefano Pessina, the Italian dealmaker who used Alliance UniChem and then Boots to propel himself to the top of an S&P500 company.
But Pessina, KKR and Alliance Boots got lucky with Walgreens, which proved surprisingly willing to do a deal of questionable strategic sense. That luck seems absent this time round.
Boots is not a business where some fancy financing can fix the business. Most of its stores are leasehold, so there is no easy sale and leaseback of the property estate to fund the deal. There are pension complexities. Easy cost savings have long since been extracted: if anything, its legions of lifeless stores need a bit of fat injected back in.
Now any buyer knows they will have to work harder than they would have in January. Leverage has come down across the industry while debt costs have gone up. Unless the central bank free money starts flowing again, multiples may stay lower for longer. Bidders have scattered. Even the interest of the UK’s retail buyers of last resort, the Issa brothers, is in doubt.
What is left is a muddle of a bid from Apollo and Mukesh Ambani’s Reliance Industries. Exact terms are unclear, as is the valuation, since Goldman Sachs is running the auction and apparently hasn’t told Walgreens the details. But we know it’s fully financed. That means Apollo takes primary responsibility for fixing Boots’ domestic market, Reliance gets a shot at Asian expansion for the brand and Walgreens stays on with a minority stake but shorn of operational responsibilities.
No doubt there is a part of Pessina that cannot bear to fully part with a long-held asset that has never quite come good. But if Walgreens accepts the bid — and it may well opt to try its luck with a Boots float later instead — it will be the sign of a desperate seller.
Apollo is not a generous bidder. It has a reputation for never overpaying for assets, to put it politely. The Reliance bit of the bid feels like something of a sideshow: successful expansion in India is far from assured and Ambani’s group is hardly known for its UK retail operational expertise.
If a deal can’t be done, it may as well be a sign to everyone bar the infrastructure bankers to pack up their bags for the summer and wait for the distressed sales to start rolling in come September when the consumer crunch starts to really hit companies’ forecasts.
Boots’ deal would not be the bottom. But it is surely a sign of how far the cycle has turned.
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