Private equity circles as Walgreens puts Boots on sale at £7bn

The American owners of Boots are seeking up to £7 billion for the pharmacy chain as Asda’s financial backers join a raft of private equity firms readying bids.

Walgreens is understood to be keen to offload the entire Boots business, with its operations in the UK, Ireland and Thailand, as well as the No7 beauty brand. The group would prefer one bidder to buy all of the assets but a piecemeal sale is possible.

Asda’s private equity backers at TDR Capital are among those circling Boots, which could yield substantial savings given the overlap in products sold between the two retailers. TDR is understood to be planning to bid without a partner.

Bankers from Goldman Sachs could circulate a memorandum to potential buyers as soon as this week, with a view to completing the sale in the first half of the year. If bidders do not meet the reserve, which analysts said could near £7 billion, Walgreens will explore a listing in London.

CVC Capital Partners is assembling a joint bid with fellow private equity firm Bain Capital, an arrangement that has raised eyebrows in the City because of the involvement of CVC’s managing partner Dominic Murphy.

Murphy has served on the board of Walgreens as a non-executive director since the American giant bought a 45 per cent stake in Boots in 2012, although he has recently recused himself. He also serves on the board of online beauty retailer THG. Murphy is thought to have personally made tens of millions of pounds from leading KKR’s highly leveraged buyout of Boots in 2007. KKR later sold out of the company.

CVC is understood to see potential for Boots to offer a broader range of healthcare services and believes growth in its beauty division could be accelerated online.

Bloomberg News reported last week that Advent, KKR, Clayton Dubilier & Rice and Apollo were all considering bids for Boots. Private equity firm Sycamore Partners is also said to be considering entering the auction.

Walgreens, led by chief executive Roz Brewer, has decided to sell Boots to focus on its home market. For Walgreens executive chairman Stefano Pessina a sale of Boots heralds the end of his long involvement with the retailer, which he merged with his pharmaceutical wholesaling business in 2005.

Valuing the chain will be a difficult task after the pandemic took a heavy toll on Boots. Its UK division made a pre-tax loss of £287 million in 2020 compared with a £217 million profit the year before. The chain’s like-for-like sales rebounded by 16 per cent in the three months to November 30.

Boots operates 2,276 stores the UK, 90 in Ireland and another 253 in Thailand.

Stefano Pessina grinned as the tickertape fell around him. It was January 2015 and Pessina was ringing the Nasdaq bell to celebrate the merger of Boots and US drugstore giant Walgreens, taking the Italian billionaire a big step closer to fulfilling his dream of dominating the global pharmacy industry.

Seven years later, that dream may be slipping away. The 80-year-old’s plan to use the financial might of Walgreens to muscle into China’s vast pharmacy market has been scuppered by rising political tensions, while at the behest of shareholders, who want management to refocus on its home market, Walgreens sold its Alliance Healthcare wholesaling arm to AmerisourceBergen for $6.3 billion (£4.6 billion) last June. Now, private equity firms are circling Boots, which is on the block with an asking price of up to £7 billion. If bids do not hit the valuation, Walgreens will seek to sell off the business piecemeal or list the chain.

The empire Pessina built up through more than 1,500 deals over five decades is set to fall apart within months. Has he finally bitten off more than he can chew — or does the inveterate dealmaker have one more rabbit to pull out of the hat?

Pessina began to amass his empire slowly. After restructuring his father’s ailing pharmacy in Naples in the 1970s, he did the same for others in exchange for stakes in their firms, cultivating personal relationships with pharmacy owners across Europe — and positioning himself to buy their chains when the time came.

He became professionally and romantically entwined with Ornella Barra in the 1980s, when she sold her wholesaling business to him — although Pessina, a Catholic, was only recently divorced from his estranged wife, with whom he has two children.

Barra is a sharp operator in her own right and quickly took her place as one of Pessina’s main lieutenants.

It was on his yacht off the coast of Sardinia that Pessina struck a deal to merge Alliance UniChem, his wholesaling empire, with Boots in 2005. It saw him gain a 15 per cent stake and the position of deputy chairman in the retail giant, which was listed on the London Stock Exchange at the time.

Pessina, who qualified as a nuclear engineer, has never been an archetypal retailer. Former colleagues describe a deeply rational thinker more interested in studying the accounts than traipsing around stores and making friends with the staff. One senior industry source said that Pessina, who speaks heavily accented English, still possessed an understated charm and liked to “work the room” at industry events.

At Boots, Pessina did not take well to public company life. His solution was to team up with Kohlberg Kravis Roberts (KKR), the private equity firm immortalised in Barbarians at the Gate, for a leveraged buyout of Alliance Boots barely a year after it had been formed.

Pessina became the fox in the henhouse. Both he and Barra were barred from head office and temporarily booted off the board. The emergence of a rival bid from private equity tycoon Guy Hands drove up the price KKR paid to £11 billion.

The Boots buyout, funded with almost £9 billion of debt, threatened to turn sour when the financial crisis hit, but trading was resilient. Pessina and KKR are thought to have made hundreds of millions buying up debt the banks were forced to sell at huge discounts, in addition to the billions they made flipping the company onto Walgreens.

Pessina is not the flashy type, although he has used some of his estimated$10 billion-plus fortune to amass a Flemish and Italian art collection, as well one of precious stones.

“Stefano is one of the brightest businessmen I’ve met — a superb negotiator and a wonderful strategic thinker,” said Sir Nigel Rudd, who chaired the board of Boots when Pessina and KKR took the chain private.

Pessina has, to put it politely, a distant relationship with the taxman. He has lived with Barra in the tax haven of Monaco for years. After taking Boots private, Pessina and KKR redomiciled the business from Nottingham to the low-tax canton of Zug in Switzerland. Boots has since redomiciled in its home market. He then clashed with the Walgreens board over a plan to move its headquarters from Illinois to London to take advantage of the UK’s lower corporate tax rate — ultimately shot down.

While his approach to tax may divide opinion, Pessina’s negotiating skills are beyond reproach. Sources who have been on the other side of the table describe a feeling of being two moves behind.

He is tenacious, too. When Sainsbury’s rejected an offer to buy its pharmacies in 2015, Pessina is said to have lobbied the board to change their minds — despite bidding half the amount tabled by Lloyds, the eventual winner.

Pessina also has a comprehensive knowledge of deal structures and a knack of cleverly positioning himself. In 2012, Walgreens agreed to pay Pessina and KKR $6.7 billion for a 45 per cent stake in Boots with an option to buy out the remainder, involving a payment of 144 million shares. By the time Walgreens exercised that option, the value of its shares had almost doubled.

Since their initial pop, though, shares in Walgreens have drifted, raising questions over whether Pessina’s Midas touch has deserted him. Online pharmacies have lured away customers and a merger with rival Rite Aid was blocked by US regulators. Meanwhile, CVS Health has merged with insurance provider Aetna to create a $139 billion healthcare powerhouse.

In the UK, where Barra was dispatched in 2020 to whip the business into shape, Boots is struggling back to its feet after the pandemic hit.

Shareholders may have pushed for the sale of Alliance Healthcare and Boots, but Pessina’s track record suggests he will be back in the driving seat before long: the Italian empire-builder has repeatedly expressed his horror at the idea of retirement.

“Stefano has got more than enough money, he could have stopped 20 years ago,” a senior industry source said. “I get the impression he just enjoys the game.”