Big Boots to Fill: Indian billionaire plans Boots takeover

May 8, 2022

3 min read

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What's going on here?

Mukesh Ambani, India’s second-richest man, is reportedly working with US buyout firm Apollo Global Management on a potential joint bid for UK retailer, Boots.

What does this mean?

One of India’s richest men, Mukesh Ambani, may be eyeing the British high street pharmacy chain Boots. According to sources, Ambani’s company, Reliance Industries (RIL), is working with Apollo Global on the potential bid. If successful, the bid would see Boots expand its presence into south-east Asia, the Middle East and India. It is understood that under the joint plan, both groups would hold equity stakes in Boots, but whether such stakes would be the same is unclear.

This move comes after Boots’ current owner, US Boots Alliance, announced in December 2021 that the review of the UK business could lead to a sale. It has set a deadline for mid-May for final bids. Others reportedly taking part in the Boots takeover process include Asda owners, billionaire Issa brothers, Mohsin and Zuber Issa, and TDR Capital – a private equity firm. Meanwhile, an early frontrunner in the Boots sale was the joint bid of Bain Capital and CVC Capital Partners; however, both dropped out of the process amid doubts around the retailer’s valuation during the market turmoil in the wake of Russia’s invasion of Ukraine.

What's the big picture effect?

When private equity firm KKR bought Boots in 2007 for £11.1bn, it was a big deal for three main reasons. Firstly, it was not common for the buyout industry to acquire British ‘blue chips’ (blue chips refer to companies which represent a stable, profitable and long-lasting investment). Secondly, a lot of leverage was involved – almost £9bn of debt was used to fund the purchase price. Thirdly because of the prestigious standing Boots had with British consumers. Now that Boots is again on the market, a new acquisition would still be considered a big deal.

Boot’s plight has been quite noticeable. According to UK business writer Cat Pooley, “just as Walmart found with Asda, a global strategy set in the US did not always work in the UK. Walgreens has been distracted by problems in its home market”. The solution? Pooley thinks that the fix for Boots is “a bit of local focus, some investment and a sale in four or five years’ time”.

Boots, which currently has more than 2,000 UK stores, was expected to attract substantial interest because of its “market-leading position and brand”, its pharmacy income’s stability, and the potential to enhance its financial performance. However, the plans for a multi-billion-pound sale have experienced various difficulties as potential buyers withdrew from the process and bidders submitted concerns about a deal’s financing amidst market turmoil due to Russia’s invasion of Ukraine.

A primary consideration for all prospective private equity buyers is financing. Big buyouts are commonly financed by short-term bank loans, which are later refinanced in the bond market (bonds are a ‘debt instrument’ that can be issued by companies and sold to investors). But this process has already proven challenging even prior to the Russian invasion of Ukraine, which induced disruption in debt markets. When it comes to Boots, financing is a crucial factor for another reason. Boots has a sizeable defined-benefit pension scheme, which “is in surplus but not by enough to allow a buyout by an insurer”. This means that potential buyers would have to take responsibility for ensuring that the pension scheme remained sufficiently funded unless it is negotiated that the US owner, Walgreens, could retain it. Despite these difficulties, the pharmacy business still remains an appealing asset. As reported in the FT, “There is huge potential in this company… People are taking better care of themselves after Covid and the NHS is looking to deliver more services through pharmacies”.

Mukesh Ambani might be the right fit for Boots. His company, Reliance, India’s largest listed company by market capitalisation and India’s largest retailer, has already made various overseas acquisitions. While it acquired British toy store Hamleys in 2019, Reliance leans more towards investing in expanding its domestic businesses. For example, it recently invested in healthcare companies, including genetics firm Strand Life Sciences and bought a majority stake in pharma sales company Netmeds in 2020. Boots would benefit from working with a skilled retailer who can roll up their sleeves and get stuck in. In return, an acquisition of Boots could help Ambani’s Reliance strengthen its ‘retail foothold’ beyond India while also expanding its market share within the country.

Report written by Goodness Asaolu

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