Friday Letter Doing things because you can

In the end, they won it fair and square. Didn’t they?  

The mighty Kohlberg Kravis Roberts (KKR) was always odds-on favourite to come first in the race for UK pharmacist and retailer Boots Alliance. With vice chairman Stefano Pessina and his 15 percent equity stake on its side, the firm had a massive advantage over any potential rival from the outset.

UK buyout group Terra Firma still thought it was a challenge worth taking on, and they fought a good fight, make no mistake. But in the end, there was no getting between KKR, Pessina and Britain’s largest chemist.

In the meantime, shareholders in Boots were delighted to see Guy Hands’ intervention drive up the share price. The fact that there was serious competition for the asset also did much to placate investor concerns over Pessina’s conflicted role in the transaction.

But even though KKR finished up paying a full price for the business, a bad taste in the mouths of some remained. One issue in particular has caused rumblings: the £106 million break fee that KKR secured along with the board’s recommendation for its bid.

Sources close to Terra Firma, perhaps unsurprisingly, felt the fee was way too high. Break fees, they argued, are intended to cover a bidder’s expenses in case the target’s board has a change of heart. They should not deliver unsuccessful bidders with big profits, and they should certainly not be of a magnitude where they begin to resemble poison pills.

“Let’s be generous and say KKR spent £30 million on the bid,” suggested one disgruntled observer. “That’s a long way from £106 million.”

As it happened, the break fee did not stop Terra Firma from putting a higher offer on the table, so it was evidently more digestible than one might think. Neither can there be any suggestion that KKR was doing anything legally suspect in pushing for such a large figure. The Boots board may not have covered itself in glory by agreeing to it, but as far as KKR is concerned, you might say congratulations are in order for a fine piece of negotiating.

That said, there is also an argument that something within the letter of the law can still be perceived as standing outside good practice. When Citigroup traders used trading technology for a raid on the Eurobond market in 2006, there was nothing illegal about the bank’s actions – and yet many in the market insisted the market’s code of conduct had been violated.

There are those who see a parallel between Citi’s raid and the KKR break-fee, in the sense that the two episodes highlight philosophical differences about where the line between healthy profit maximisation and excessive aggression should be drawn.

To land Boots, hard-nosed KKR betrayed an attitude that Europeans in particular may find difficult to endorse. In the final analysis, any charges of “unfairness” would seem overblown: KKR did win the auction fair and square.

But at a time when private equity’s public image is under intense scrutiny, doing things because you can may not be the most conducive strategy in the long run.