KKR’s takeover talent(2)

Kohlberg Kravis Roberts showed its mastery of the public-to-private transaction after it agreed the £11 billion Alliance Boots bid. Yet why is it that its deal succeeded in an arena where European private equity firms have experienced difficulties lately?

KKR’s £11.39 per share takeover of the chemist Alliance Boots is the first time private equity has moved into the FTSE 100. CVC Capital Partners and Terra Firma must be asking why their respective bids for Sainsbury’s and Boots failed where KKR succeeded. Here are four reasons why:       


The kingmaker – All analysts coincide in recognising KKR’s key first step was the recruitment of Stefano Pessina, the Boots deputy chairman and its biggest shareholder with a 15 percent stake.  A source close to the deal said the buyout firm had surmounted a huge obstacle by securing Pessina’s involvement: “Pessina didn’t want to be seen to have delivered the company to KKR at a discount price and so it needed to fully commit and pay a decent sum. He was a reluctant kingmaker yet a kingmaker nonetheless.” He added the Sainsbury bid failed because CVC did not get the Sainsbury family on-side.


The generous offer – In the dramatic closing days of the deal it had looked at one point as if Guy Hands’ Terra Firma would be able to ride in and snatch KKR’s prize with a bold £11.26 per share offer. Yet such speculation failed to take in to account KKR’s determination to secure the pharmaceutical company and the US firm ended up paying an earnings multiple of 22 times after securing a 10 percent stake on the morning of the deal.


Due diligence expertise – Many private equity firms have come unstuck in public to private bids because unlike bids for private companies the work which is needed to compile due diligence on a listed company has not already been done. KKR’s experience and ability laying the groundwork to make the due diligence stage of the offer impressed people who worked with them on the deal.  Sources close to the deal said it was crucial KKR put up a fully financed bid and Terra Firma struggled because they did not do so.  Andrew Dowler, Terra Firma’s spokesman, lamented: “We were not given access to management, so as a result coming forward with a fully financed bid was not possible because we were not allowed to begin due diligence.” He added the firm had all the funds available and if Terra Firma could have begun due diligence his firm would have put forward an offer higher than KKR’s triumphant bid.


Market knowledge – Boots chairman Sir Nigel Rudd complained to the Financial Times earlier this week stock market analysts had been “stupid” not to recognise the value of the business after the merger of the two companies. Sources close to the deal concurred saying the market had failed to appreciate the business’ complexity. KKR also has prior experience managing Canadian pharmacist Canada’s Shoppers Drug Mart Corp and it is believed the firm will be able to use this expertise to bring added value to Boots.