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KKR offers a $70bn buyout as medicine for ailing pharma giant

How the share price has fallen for Boots group


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WHAT would you do if you found a spare $70bn down the back of the sofa? You could buy Uruguay which has a GNP of $55bn or so; also pick up Nicaragua (GNP $12.8bn) and still be left with change in your pocket.

Or you could do what the famous American private equity firm KKR is doing and bid for Walgreen Boots Alliance (WBA), the world's largest retail pharma group. If the deal goes through it will be the biggest private equity transaction on record.

Although it incorporates the famous Boots name, WBA is of relatively recent origin and was inspired by the takeover ambitions of the Italian billionaire Stephano Passina. Mr Passina had grown his own pharma chain first in Italy, then across Europe and finally merged it with Boots.

Five years ago Walgreen, the US healthcare retailer, purchased Alliance Boots and Mr Passina emerged as a significant shareholder.

Today, WBA has become one of the world's largest purchasers of prescription drugs. Its portfolio of retail and business brands includes Walgreen, Duane Reade, Boots and Alliance. Among its global health and beauty products are No 7, Soap & Glory, Liz Earle and Botanics. It is valued at $46bn and trades in 25 countries with 440,000 employees.

The group is organised into three divisions; retail pharmacy USA (Walgreen and Reade), retail pharmacy international (Boots) and pharmacy wholesale (Alliance). Retail pharmacy USA is the group's main business, accounting for almost three-quarters of group revenues and operating profits. Last year revenues were $104bn, up 6pc but operating income fell 15pc. An added problem for WBA is that sales of prescription drugs account for more than 70pc of the division's revenue which makes it a hot topic in the US and vulnerable to political and regulatory change. It also faces the wave of consolidations within the US as shown when its rival CVS purchased Aetna. The division operates in 50 US states and its footprint covers 80pc of the population within 8km of Walgreen's 9,600 stores.

Retail pharmacy international operates 4,600 stores in eight countries. The UK is its largest market. Revenues last year were $11.5bn, down 7pc, but operating income fell a massive 48pc. The tough conditions on the UK high street are a challenge for 170-year-old Boots. Its pharma business has pricing pressure with NHS cuts and its beauty business faces intense competition from supermarkets and online.

Boots' property portfolio also requires attention. Its 2,500 stores include many small pharmacies on high streets vulnerable to online competition. Some analysts believe it needs to up its game in e-commerce and find a new format for its shops.

The group's third division is one of the largest pharmas wholesalers and distributors. Operating under Alliance Healthcare, it services more than 115,000 pharmacies and hospitals from its distribution centres in 11 countries, mostly in prescription drugs.

Since its listing five years ago, WBA experience as a public company has been traumatic. Revenues have risen 35pc to $137bn but net income fell 20pc to $4bn; the share price has fallen 25pc.

The group is grappling with tough conditions in its profitable prescription drugs wing in the US and the beauty business in the UK.

To cope, the group has promised savings of $1.8bn by 2022 so stores closures and redundancies can be expected. Delisting might be the best course of action.

To some observers, KKR's $70bn buyout proposal is a real test and Mr Pessina's shareholding could be critical to getting it over the line. If the deal falters, WBA shares trading at $52 could be an interesting play.

For those with long memories KKR pioneered leverage buyouts and were the 'stars' of 'Barbarians at the Gate' and are no slouches.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent