Alliance Boots shows some transparency

June 10, 2008


Alliance Boots show a strong profit rise, after the friendly takeover of Boots by Steffano Pessina. The news also indicates a calculated tranparency rare for traditional Private Equity ventures

The story of the profit rise at Alliance Boots was found in The Times on line and picked up by the agencies. According to The Times, Alliance Boots

will this week [June 9 – 13, 2008] buck the gloom on the high street when the pharmacy chain reports a 20% increase in trading profits during its first year as a private company.

Stefano Pessina, the executive chairman who teamed up with Kohlberg Kravis Roberts to mount the £12.4 billion buyout, will announce on Tuesday a £770m profit for the 12 months to March.

The performance gives Pessina the opportunity to face down critics who said he overpaid for Alliance Boots, which has 1,500 UK shops and distributes medicines across Europe. Banks that financed the deal – Europe’s largest leveraged buyout at the time – were forced to discount its £9 billion of debt in order to sell it on.

Higher profits were achieved by driving costs from the business, which was created a year earlier from the merger of Alliance Unichem with Boots. Sales at its largest stores are proving the most resilient. However, questions remain over whether it can maintain such momentum in a stuttering economy.

The story so far

In an earlier post Leaders We Deserve reported

Cherished British Drug company Boots merges with European partner, whose wealthy owner, Stefano Pessina, becomes deputy chairman in the new company, Alliance Boots.

The amicable arrangement suggested that in any leadership transition, Mr Pessina would be a cuckoo in the nest. In short order, chairman Sir Nigel Rudd resigned. further friendly discussions were followed by a takeover by private equity firm KKR. The move was presented openly as a vehicle which would install Pessina as its main driver

KKR and Stefano Pessina had made it known that they wanted to keep the top team intact. But for all the continuing expressins of good will, the inevitable was to happen.

Thursday July 12th 2007, Richard Baker decised to accept a severance deal that would be worth some £10 million. It seems as if they made an offer for him to stay, or decline with honor. In an interview with he says

“Stephano is a gentleman. He has been as good as his word with me every step of the way..I am confident about the future of the company ..I have looked everyone in the eye at Nottingham [corporate HQ] and told them that”

.

Another top retail executive, Scott Wheway, is also leaving, again in an amicable fashion.

Not too difficult to predict

The story has been followed in earlier posts. It struck me that in the original merger between Boots an Alliance, the new board had a majority of former Boots executives. But the Alliance side was the more profitable, and Stephano brought with him a sizable shareholding and considerable personal wealth.

It was not difficult to predict what would happen. I noted earlier this year that

If takeover is successful, I am not expecting many of actual board members to retain their positions.

And so it has come to pass. Not brutally. But Pessina has enough power to be magnanimous. Mr Baker may not have had much temptation to stay on when the alternative was a £10 million incentive to leave, with more chances of securing a new leadership role elsewhere.

Leadership lessons

I’m not sure of the leadership lessons here. Perhaps it is that self-made billionaires are not all ego-crazed narcissists. Maybe absolute power is not always accompanied by absolute ruthlessness.

The initial deal was done a few months before financial markets went into melt-down. Alliance Boots seems to be supporting the enthusiasts of free market capitalism in the robust form of Private Equity interventions.