Sale of boots deflected by falling number of buyers and market turbulence

British chemist Boots’ multi-billion pound sales plans have run into a series of difficulties after a potential buyer pulled out and bidders raised concerns over funding a deal with boiling markets due to Russia’s invasion of Ukraine.

A consortium of Bain Capital and CVC Capital, previously seen as a leading candidate to buy the business from US parent company Walgreens Boots Alliance, did not make an offer by the deadline last week, said two people familiar with the matter.

The first non-binding offers were submitted by the American takeover group Apollo and by the owners of the supermarket group Asda – the brothers Mohsin and Zuber Issa and the private equity firm TDR Capital.

Asda Group has offered two alternative deals, in which either the supermarket group or its owners could lead the takeover, a person familiar with the process said.

New York-based Sycamore Partners, which owns office supplies company Staples and whose senior adviser John Lederer sits on the WBA board, had also expressed interest, another person familiar with the process said, although ‘it is not clear whether the group has submitted an offer.

Walgreens Boots and the private equity firms all declined to comment.

Dominic Murphy, also a member of the WBA board, had overseen CVC’s preparations for a potential bid and withdrew from board discussions of the process.

CVC and Bain were seen as particularly well placed due to the involvement of Murphy, a key figure in KKR’s takeover of Boots more than a decade ago, and their past involvement in retail and consumer transactions.

The pharmacy-led chain was put up for sale by WBA late last year as it focuses on retail and expanding medical services in its home market.

Boots, which has over 2,000 stores in the UK, was expected to attract strong interest due to its market leading position and brand, stable pharma revenue and potential for improved performance financial.

But one person who followed the process said it was remarkable how relatively narrow the field seemed.

There was no doubt Walgreens was seriously considering divesting Boots, the person said, but the retailer’s stated intention to “move at pace” was at odds with the way the process was being conducted and the level of information provided.

“I still think a deal will be done, but in a rather non-linear way,” the person concluded.

Another person involved said the process was “a bit up in the air” because potential bidders had little access to the information needed to carry out due diligence and no deadline for binding bids had been set.

Sky News first reported the withdrawal of Bain and CVC.

Funding is “a major consideration” for all potential private equity buyers, according to another person with knowledge of the process.

Large buyouts are usually financed by short-term bank loans which are then refinanced in the bond market. But this process was already proving difficult even before Russia’s invasion of Ukraine caused turmoil in debt markets.

Clayton, Dubilier & Rice has still not tapped the bond markets for a refinancing package backing its £10bn acquisition of supermarket group Wm Morrison, which was agreed in October, while value retailer Matalan also recently decided against attempting to refinance its £500million debt pile.

Boots has a sizeable defined benefit pension plan, which is surplus but not enough to allow buyout by an insurer. This would leave any buyer responsible for ensuring the program remains properly funded, unless Walgreens can be persuaded to keep it.

However, the company remains an attractive asset, according to the first person. “There is huge potential in this business,” he said. “People are taking better care of themselves after Covid and the NHS is looking to provide more services through pharmacies.”

Boots derives around 45% of its income from providing services to the UK Public Health Service, including prescriptions and vaccinations.

The cost of Boots’ housing stock could drop sharply in coming years as leases come to an end. WHSmith, a stationery retailer with a smaller portfolio but also high street focus, said it secured average rent reductions of 50% when it renewed leases.

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