Americans Target British Businesses

Published in Investing on 21 June 2012

They're already snapping up Boots and other British companies for cash -- who might be next?

The UK's biggest corporate event this week is the news that giant US pharmacy chain Walgreens (NYSE: WAG.US) has bought a 45% stake in British rival Alliance Boots.

Walgreens goes global

On Tuesday, Walgreens announced that it paid $6.7 billion for a 45% stake in Alliance Boots, owner of two of the biggest brands on British high streets: Boots the Chemist and Alliance Pharmacy.

Together, these two companies have a long and illustrious history, as John Boot opened his first pharmacy in 1849. Combined, they are the leading health and beauty group in the UK, with over 116,000 employees, 3,330 stores (including 3,200 pharmacies) and operations in 25 countries.

In October 2005, the merger of Boots and Alliance UniChem was announced, with the deal completing in July 2006. The merged group was then itself taken over in a £12.4 billion buyout in April 2007.

Since that date, the group has been owned by Kohlberg Kravis Roberts (KKR), one of the world's leading private-equity firms, and Alliance Boots' executive chairman Stefano Pessina, a 71-year-old Monte Carlo-based Italian billionaire and former majority shareholder in Alliance.

American ambitions

Walgreens -- America's biggest pharmacy chain with nearly 8,000 drugstores and sales of $72 billion (£46 billion) last year -- paid $4 billion in cash and $2.7 billion in shares for a 45% stake in Alliance Boots. This values the entire equity of the target at $14.9 billion (£9.5 billion).

However, the American Goliath's ambitions don't stop there. Within three years, Walgreens may exercise an option to buy the remaining 55% of Alliance Boots for $9.2 billion, made up of $4.9 billion in cash and Walgreens shares worth around $4.6 billion on Tuesday. At such time, Walgreens would also take on Boots' net debt, which stands at about £7 billion.

Thus, by any standards, this is a big deal. Indeed, adding up all the amounts that Walgreens would need to pay to take full control of its British rival, the US group is looking at a total price tag of $27.2 billion (£17.3 billion). This is a massive sum, but easily funded from the US drugstore chain's enormous cash flow.

Down goes Walgreens

When Alliance Boots was created, market pundits feared that it was a pricey, top-of-the-market merger that relied too much on debt and leverage. However, given the full price offered by Walgreens, KKR and Pessina look to have made a tasty profit on their investment.

Despite the subsequent credit crunch and global recession, the current owners of Boots could, by 2015, double or triple their original equity investment made in 2007. That's a fairly decent return, given the global financial turmoil of the past five years.

Then again, shareholders in Walgreens may not be so delighted with this deal. On Monday, before it was announced, Walgreens shares closed at $31.96. Last night, they closed at $29.21, down 8.6% in 48 hours. Hence, the shares KKR and Pessina were given are already worth about a twelfth less than they were prior to the deal being announced. Ouch.


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The American invasion

This is merely the latest in a long line of US takeovers of UK firms stretching back decades. Indeed, there has always been healthy M&A (mergers and acquisitions) activity between our two countries, partly driven by our common language, shared Anglo-Saxon capitalism and broadly similar financial markets.

For example, in August 2011, US computing behemoth Hewlett-Packard (NYSE: HPQ.US) launched an $11.7 billion (£7.1 billion) bid to buy UK software firm and FTSE 100 member Autonomy Corporation.

Autonomy shareholders grabbed this cash with glee, thanks to the 2,550p offer price being pitched 64% above the firm's share price before the deal was announced. However, it remains to be seen how successful HP's takeover of the Cambridge-based firm will be, after Mike Lynch (Autonomy's founder) left HP last month.

Furthermore, when US food giant Kraft Foods (NYSE: KFT.US) launched a £10.2 billion bid for famous British chocolate company Cadbury in September 2009, it led to a trans-Atlantic war of words. Eventually, Kraft won Cadbury for £11.5 billion in March 2010, but then reneged on promises not to close several British factories.

What's more, there was more US-UK M&A news this week when the share price of FTSE 250 engineer Invensys (LSE: ISYS) yesterday soared by almost a third (33%) to close at nearly 270p, up 67p.

Alas, shares in Invensys slumped by a sixth (16%) this morning to 215p, after the firm confirmed that it had "been in highly preliminary discussions with third parties" about possible transactions. However, these discussions -- including "a highly preliminary approach" from Emerson Electric (NYSE: EMR.US) -- are no longer ongoing.

Four UK targets for US firms

Following the Boots/Walgreens news, I poked around the FTSE 100 (UKX) to find firms that would be a good fit for cash-rich US rivals. Here are four that I found:

1. AstraZeneca

With a market value of £35 billion, AstraZeneca (LSE: AZN) -- the UK's second-largest drug-maker -- might be a good fit for US giant Johnson & Johnson (NYSE: JNJ.US). Right now, Astra trades on a forward price-to-earnings (P/E) ratio of just 7.4 and a dividend yield of 6.8%, covered 2.1 times. What's more, this would be a 'clean' deal for J&J as -- unlike almost every other FTSE 100 firm -- Astra has net cash.

2. Rexam

As well as being the world's biggest can-maker for food and drinks, Rexam (LSE: REX) also supplies plastic packaging to the healthcare, pharmaceutical, personal-care and household-care markets. When I last reviewed Rexam's results in February 2011, I gave this 'dull' company a big thumbs-up.

With a market value of £3.6 billion, I believe that this FTSE 100 firm would be an ideal meal for Berkshire Hathaway (NYSE: BRK-A.US) (NYSE: BRK-B.US), investing genius Warren Buffett's conglomerate. Buffett loves market leaders in boring businesses (he's bought brick, carpet and roofing companies), so I'm certain that Rexam would be an ideal piece to add to Buffett's jigsaw.

3. BAE Systems

Despite being Britain's leading defence business, BAE Systems (LSE: BA) has a market value under £9.5 billion, trades on a forward P/E of just 7.2 times and offers a prospective dividend yield of 7%, covered 2.1 times.

Surely, BAE would be a steal for a giant American defence contractor such as Lockheed Martin (NYSE: LMT.US)? On the other hand, the UK government's 'golden share' in BAE -- plus the requirement for the group to have a British chief executive -- could deter even the friendliest foreign bids.

4. Sage Group

Always the bridesmaid and never the bride, Sage Group (LSE: SGE) has watched as countless other European software businesses have fallen into the arms of deep-pocketed US competitors. In the past, Sage has been linked to deals with the likes of Microsoft (NASDAQ: MSFT.US) and other high-tech giants, but remains independent.

Nevertheless, with a market cap below £3.5 billion, a forward P/E of 13.4 and a prospective dividend yield of 4.2%, covered twice, surely Sage would be a nice fit for the likes of Larry Ellison's Oracle Corporation (NASDAQ: ORCL.US)?

Speaking of billionaires and FTSE 100 firms, which UK business has Warren Buffett been aggressively buying into in 2012? To find out which big British brand the 'Oracle of Omaha' is backing big-time, simply download your free copy of our latest report, "The British Business That Warren Buffett Loves".

Finally, which FTSE 350 firms do you think are the most likely candidates to attract foreign (or domestic) bidders in 2012? Please let us know in the comments box below...

More from Cliff D'Arcy:

> Cliff does not own any of the shares mentioned in this article.

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goodlifer 21 Jun 2012 , 11:42pm

I seem to remember reading somewhere that SBRY was a possible target for some possibly American predator.

What are your views?

goodlifer 22 Jun 2012 , 1:01pm

And how about Smith and Nephew?

DuckthatCow 22 Jun 2012 , 1:37pm

Alliance Pharmacy disappeared off the High Street a couple of years ago, they're all Boots shops now.

TheWizardOfUzz 22 Jun 2012 , 2:07pm

Yes , Boots have been on the UK high streets since the mid 19th century and "boots" is the High Street presence of the group and they pretty much have a monopoly.

I recently had reason to correspond with Alex Gourlay, MD of Boots UK Ltd., about not letting their position take their eyes away from their most important resource : Customer Service.

The customers they have are often extremely reliant on their services.

midmay 22 Jun 2012 , 3:34pm

All tthese takeovers are to be truthful against our national Interestsand we should be intervening to stop some of these sales. It is okay to get a few billion now but boots is other countries and justl ike Cadbury and Rowntree and a few others were an asset when it came to assisting to keep our trade deficit in check that has now totally disapeared and that is not a good thing for UK plc. We need government action soonor nothing will be left on the shelf.

AlysonThomson 22 Jun 2012 , 4:06pm

I agree with midmay.

Housemartin2 22 Jun 2012 , 6:37pm

I am afraid I cannot agree with the idea of government action to prevent the sale of companies or to adjudicate on whether the buyer is acceptable in the light of national interest. If the current owners want to capitalise with certainty a future uncertain income stream, then I am not sure it is anyone's place to stop them. We are an open society and a trading nation and such things strike at the heart of the way we run our economy and which makes us an attractive place to do business. It is not a zero sum game however, new businesses are created all the time. Also given that the future is unknown, I would not like to pontificate on what is the the national interest in these sorts of decisions. Certainly I would not want politicians to do so on our behalf. I agree that there is a big emotional wrench when these emblematic companies are sold and I feel it as much as any but we need to be rational.

craftyspeculator 22 Jun 2012 , 9:24pm

Reckon the next big US takeover in 2012 will be Exxon buying Gulf Keystone Petroleum.

Eden77 23 Jun 2012 , 2:16pm

Boots essentially passed out of 'British' ownership into private hands several years ago with the KKR and Pessina buyout, which always had the look of a limited timespan until the company was floated to realise profit on the deal. Company cost-cutting, restructuring and merger activity to maintain revenue growth has been geared to that time-frame. Without the favourable environment for a stock market float the Walgreen deal was presumably actively sought as the best means of reducing investment and taking profit at this stage.
As such, it would seem to be a very different scenario than a US takeover of a FTSE 100 company.
With a 45% Walgreen stake the company will presumably need to take on US company governance and reporting requirements which rigours will place some stress on the business. I can't help but feel that ,although Alliance Boots is expanding overseas, its UK performance has peaked at least in the short/ medium term market. Has Walgreen got a good deal? Only time will tell but even they were only up for a 45% stake , and I am with those that saw the Walgreen share price drop!

Possak 24 Jun 2012 , 12:16am

I do think that large takeovers should be scrutinised by the authorities if their scale is such as to be disruptive to the country at large, but Midmay's view that it is the foreignness of the buyers that is the issue is worrying. Goods produced here do not cease to contribute to the balance of trade just because the profits from producing them flow overseas (and American tax law in practice encourages them not to repatriate overseas revenues anyway). Job losses as a result of a takeover are a legitimate concern for the government (and naturally at odds with the interests of investors), but that's at least as true of a takeover of one British company by another to achieve efficiencies as if a foreign company with plans to cut British jobs rather than ones in its homeland.

MrTaurus 24 Jun 2012 , 12:52am

Boots the Chemists was founded by John Boot and developed by his son Jesse Boot, later Baron Trent. Henry Boot was someone else in another industry entirely.

steveunsworth 24 Jun 2012 , 2:20am

To those who want to throw up walls to prevent foreign acquirers: where do you think the British nation would be if we had been prevented from acquiring foreign assets in our heyday? Protectionism stifles growth and ingenuity. Go live on a commune if you want the warm glow of isolationism!

BrnzDrgn 25 Jun 2012 , 9:51am

Lets sell off all our companies to foreign corporations and then sit around wondering why we don't make any money for the country while they syphon off the earnings!

Okay who owns Super Drug? I will probably be taking my business there in future, or Wilkinsons.

scotsboy1 28 Jun 2012 , 6:14pm


So until this week you were happily spending your money in that great British institution KKR and Pessina?

It wasn't British, it was foreign owned. Do you also object to UK companies buying businesses abroad? Do you consume only British produced goods? Or do you accept that businesses do business abroad and buy businesses abroad, just not ones you like the name of?

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