KKR will not acquire more than 30% of Boots

Alliance Boots saw US private equity firm KKR increase its stake to 28.7% on April 25. But IFR Buyouts Europe understands that the bidder will not go beyond the mandatory bid threshold set out by Rule 9 of the Takeover Code.

KKR will not buy more than 30% of the UK chemist on the open market because, according to UK law, once a potential bidder acquires more than 30% of a company it then has to make a tender offer for the entire company.

If it stays within this limit, it can use a scheme of arrangement to bid for a company and there is less execution risk. KKR wants to use a scheme of arrangement for its acquisition and it is still on target for posting the documents to Boots shareholders.

Advisers on the deal say that there are no major regulatory issues, and the company will follow regulatory procedures in time with the deal process.

On April 24, the KKR consortium had not been planning to increase its 1,090p cash offer, despite a higher indicative proposal at 1,115p from Terra Firma, the Wellcome Trust and HBOS. However, it is understood that later that day some shares became available and the bidder decided to build itself a blocking stake at 1,139p per share.

Terra Firma, then withdrew its offer for Alliance Boots on April 24. The revised bid from KKR and Carlo Pessina, the deputy chairman of Boots, raising their offer to £11.1bn (€16.349bn), had been seen as a “knockout” blow.

Guy Hands, the chief executive of Terra Firma, was to have met the Boots board on April 25 before mounting a formal bid. However, the meeting is now not likely to go ahead.

To support the bid, KKR and Stefano Pessina have mandated Bank of America, Barclays, UniCredit (through HVB), Citigroup, Deutsche Bank, JPMorgan, Merrill Lynch and RBS to arrange the debt. These banks are no doubt bracing themselves for what will be the largest buyout loan seen to date in Europe, smashing through last year’s US$15bn (€11bn) take private of TDC.

Before the announcement from Boots, talk suggested that the leads were preparing a debt package that contained borrower-friendly “covenant-light” language. The leads refused to comment on the veracity of these claims but a covenant-light package for such a huge buyout would be gutsy.

Although relatively well established in the US market, covenant-light leverage syndications are a new phenomena, with only one loan from World Directions thus far clearing the market – albeit with a storming oversubscription. The next test will come from Apax’s acquisition of a stake in Trader Media, which is set to hit the market shortly.

In spite of the limited number of deals, the subject has proved hugely controversial. While some lenders appear to accept the phenomenon stoically as an inevitable consequence of Europe’s hugely liquid markets and convergence with US market practices, others think the comparison with the US is disingenuous given that the country’s Chapter 11 bankruptcy procedures are absent in Europe, while sponsors’ increasingly hard line on transferability is not helping matters.

No matter what, a covenant-light package for Boots would be doubly ambitious as notwithstanding its size it comes within the UK retail sector, which was until about five years ago considered unsuitable for a buyout format. And if such a package did emerge, bankers said the documentation would have to allow for a level of structural flex to assuage lender concern as a failed syndication of this size would inflict serious damage on the reputations of those concerned.

But with this even higher price paid for Boots there is mounting concern over the pension deficit, which is reported to be in the region of £350m. Unions fear that the deficit will remain after the sale, leaving employees exposed.

Henry Gibbon, David Cox