|  Almost everywhere one looks the growing influence of private
equity is evident, with politicians, regulators and industry trade bodies
across
Europe joining the raging debate over the relative risks and benefits
it offers to companies and the broader economy.
Venture capitalism is nothing new, but the sheer number and size of buyouts
now sweeping the UK and the rest of Europe, as well as the seemingly
bottomless pockets of the private equity firms pursuing these deals,
have fuelled fears about the scale of their influence.
Private equity
activity has reached several milestones in the past two years, but none
is more significant than the potential takeover of Alliance Boots by
US private equity firm Kohlberg Kravis Roberts, which would be the largest
buyout ever in Europe and the first of a company listed on London’s
FTSE 100 index for the UK’s largest blue-chip companies.
Alliance Boots is not only one of the best-known brands on the high street
today, but it has also grown, through a series of transformational tie-ups
and organic growth over the past decade, into one of the biggest retail
companies in terms of its stock market value. When KKR finally tabled
a firm bid for Alliance Boots last week, the value topped £10bn
for the first time which was raised to over £11bn earlier this
week.
Despite sending out a clear message to the market that no public
company is now too large to fall prey to a takeover by private equity
groups, no matter how strong its brand, there are several persuasive
reasons not to listen to the harbingers of doom, who accuse private equity
specialists of merely slashing jobs, closing businesses and selling the
company within just three to five years, all with a view to making money
on their investment.
First, while private equity firms are indeed bent on making their numbers
add up to a profit, they surely share with companies’ management,
staff and their previous and future public shareholders a desire to see
the business be successful, and the steps they take after taking control
of a company will have this target in mind.
Secondly, much has been written in a negative light about the vast amounts
of cash that private equity firms have at their disposal to fuel their
acquisition sprees, but their wealth also means that they are able to
invest heavily in the businesses they buy to turn around underperforming
divisions and drive further growth in particular areas.
In Alliance Boots’s case, analysts predict the chances of widespread
job cuts are slim, in the light of previous staff reductions at the group.
One said: “They have already initiated job cuts to a large extent
so I do not expect many more layoffs, and the possibility of carving
up the company under new ownership is remote because of its unique status
serving the public.”
However, he added that the price of the acquisition, while attractive
for management and shareholders, could make it difficult to make the
deal profitable for the new owners.
“The valuation is in the stratosphere, and the bidders are unlikely
to be able to reduce the company’s debt at that price. Their most
likely route to a successful and profitable exit would be by merging
Alliance Boots with another international player, possibly in the US.”
The chances of merging or selling the company are inextricably linked
to improving its performance, according to analysts.
Analysts see few underperforming or non-core assets that could be sold
by Alliance Boots to raise cash, apart from a property portfolio worth
up to £1bn, although some suggested the company is overstaffed
and could benefit from addressing that issue. They also pointed to potential
operational savings such as cutting inventory by a 10th or more.
Industry insiders said Alliance Boots staff could face tougher operational
targets under new ownership but they added that, by taking the company
private, it would become easier to achieve profitability and business
targets without staff facing as much pressure as they do now and without
management having to fulfil the onerous responsibilities of a publicly
listed company.
That could help Stefano Pessina, Alliance Boots’s executive deputy
chairman who is working with KKR on the bid, to boost the performance
of the business on a sustainable basis more than he has so far managed,
according to analysts, who do not expect him to alter the company’s
strategy radically if he is successful.
One analyst said: “We don’t envisage much change in strategy
from the steps outlined in Boots’s trading statement last month,
including the rebranding of the group’s UK community pharmacy network
under the Boots name. Pessina would also be able to focus on speeding
up the integration of Alliance UniChem and Boots.”
However, some industry specialists have raised the issue of distrust
within and outside Boots of Pessina’s motives and asked whether
the former Alliance UniChem executive has been planning his swoop for
Boots since before the merger of the two companies. Experts do not expect
Alliance Boots’s strategy to change drastically, and deals like
this month’s distribution agreement with AstraZeneca have left
the company well positioned as the pharmaceutical industry as a whole
increasingly focuses on ways to control distribution. One stock analyst
said Alliance Boots is one of the top players in most European countries
where it operates, leaving it strongly positioned if such deals become
the norm.
If the move for Alliance Boots by Pessina and KKR surprised the industry,
the emergence of rival interest from buyout entrepreneur Guy Hands with
partners HBOS and Wellcome Trust, the medical research charity, sparked
widespread confusion, although the bid was withdrawn this week.
Although private ownership will probably make Alliance Boots staff sweat
harder for the business, the cash injection from the new owners will
help bring goals closer, and may benefit staff when it comes to their
pensions as well as the wellbeing of the business.
The independent trustees of corporate pension schemes are getting involved
to an ever greater extent in the takeovers of companies, and would-be
acquirers, either private equity or trade bidders, can often agree to
stump up cash to cut any pension scheme deficit with the promise of further
payments to come to strengthen the scheme.
One reason for the high level of criticism levelled at private equity
lies in the industry’s poor record on disclosure. When a company
switches from being publicly listed, with the results disclosure that
that entails, to private ownership, the lack of detail from then on can
be unnerving for staff and others.
Private equity has not helped itself in the past, with one industry insider
answering a question with the retort: “That’s why it’s
called private equity — it’s private.”
More recently, the spate of criticism from politicians, regulators, other
investors, companies and industry trade bodies has encouraged private
equity firms to go on the defensive more proactively, taking steps to
turn the tide of opinion back in their favour. In the UK, the private
equity industry agreed last month to set up a taskforce to devise a code
of best practice to address issues of transparency and disclosure. KKR
has signed up to the initiative. |
The
Pharmaceutical Journal