As always it is perhaps useful to use a beginning, middle and end sequence in order to clarify the options available to supplier-partners in the process. Essentially, by bringing together Alliance UniChem and Boots in 2007, and allowing for a mix of wholesale and retail business models, a starting-point has been established for a ‘new’ customer with the following (approximate) dimensions. These include a combined turnover of £18bn, a net profit margin of 4.5%, a stockturn

of nine times per annum, borrowing of approximately £9bn and a very approximate ROCE of 7%. Given the nature of the acquisition vehicle, and the price paid, the private equity owners will probably want an exit strategy via re-floatation, ideally within seven years of acquisition, the endpoint.

As far as the end-point is concerned, re-floating the company at an acceptable price in six years would be easier with a net margin of 5%, a stockturn rate of 20 times per annum, a gearing level of 30% or less, and an ROCE performance of 15%, in line with other successful global retailers. Exploration of the ‘middle’ part of the process requires that suppliers factor in deductions from recent company statements, including the following points:

• Interest payments: given the debt of approximately £9bn, resulting in interest payments of approximately £2m per day, or £853m per annum, servicing the debt obviously puts pressure on net margins. In fact, latest net profits were pushed into the red by the interest burden, resulting in a pre-tax loss of £64m for the year to 31 March.

• Repayment of debt: essentially, debt can be paid down via profit ‘surpluses’, sale of fixed assets or savings in working capital. Unless net profits can be raised to a level that can service interest payments and pay off debt, then the company will need to consider the sale of shops, depots, offices and perhaps non-core businesses such as manufacturing.

• Gearing levels: Reducing debt to a gearing level of between 30% and 50% of net worth would place the company on a par with other global retailers.

• Passing on debt: the primary banks’ difficulties in passing on the original debt may represent a problem for future borrowing, both inside and outside the group, in terms of covenants imposed.

• Global development: the company truly has the potential to be the world’s leading pharmaceutical-led health & beauty group. If fact, we believe that this is a necessary ingredient for their success in reaching the above end-point.

• Private-label: The Boots brands obviously represent a means of building global brand equity at relatively low cost and risk by selling via other retailers. This policy would also present the added benefit of being able to study the retail partner at first hand, as a prerequisite to takeover when market conditions are appropriate and financial resources allow.

• Growth by acquisition and organically: The group’s retail and wholesale business model can obviously be scaled up, and would fit well in many global markets, finance permitting. In the process, re-branding of fascias such as in Norway, are obvious steps. Again, major markets such as China, India, Latin America, and Russia, have to be very real options. Finally, this leaves a logical set of opportunities for a roll-out across continental Europe in anticipation of pharmacy de-regulation, country by country.

This presents suppliers with a major customer that has a unique business model, a potentially great global brand, and a significant appetite for cash. Some of the cash will be self-generated and the remainder will rely upon the support of suppliers prepared to regard Alliance Boots as an equal global trade partner and taking active steps to help the company to reverse the historical drift of their H&B business to the grocery multiples. This would also make the new global player less vulnerable to the one H&B retailer that could pose a real threat, everywhere.

A real case of ‘elementary, my dear Watson….’

For KamTips on 'Alliance Boots as a Global Trade Partner...' see Namnews – June 2008

Date article published: June 2008