Walgreens likely to bid for early Boots takeover?

Alliance Boots could be wholly owned by America’s largest drug-store chain within eight months. Walgreens, owners of a 45% stake, have an option to buy the remaining 55% between February and August next year.

Meanwhile, Alliance Boots already has 2,487 shops in the UK which includes 2,385 pharmacies and an additional 750 pharmacies could turn it into the 800 pound ‘gorilla in the market’.

However, an attempt to buy the whole of the Co-op’s pharmacy business would be likely delayed by the UK’s Competition and Markets Authority (CMA), probably leading to a prolonged sell-off of overlapping outlets. 

The key issue for NAMs is ‘Why the rush?’
Given that an advantage of the move would allow Walgreens to re-domicile its tax base to the UK or more likely Switzerland, thus reducing its corporation tax rate from the US 37% to the UK 21%, and even less in Switzerland, the decision is a no-brainer…

Also, as such a move would be the latest in a succession of tax inversion moves by leading US companies, it is likely that the US government will try to limit potential losses to their exchequer by interfering in the process before long…

So, the sooner, the better…especially as the partial merger has already yielded $154m in synergies, more than the anticipated $150m, i.e. the merger is patently working, in stock-market terms…

Unfortunately, such moves added to the possible Co-op bid, have placed Walgreens and Boots above government radar in a number of tax jurisdictions, likely to cause much potential distraction when the company simply wants to achieve global scale as soon as possible.

Meanwhile, NAMs and the retail competition could be advised against ‘waiting to see what happens’ instead of anticipating that Walgreens–Boots will simply take these ‘distractions’ in their stride.

In other words, time for NAMs to climb aboard now and incorporate WB into their global trade strategies, before WB does it on their terms…

Dixons Carphone - why Walgreens-Boots is different...

The Dixons Carphone merger is the latest in a series of retail unions’ response to structural change in retail…

Key metrics
The £3.8bn 50-50 partnership to be called Dixons Carphone will result in a £12bn turnover company, made up of Carphone’s £3.7bn and Dixons £8.2bn.
In terms of stock market value, Carphone's market capitalisation is £1.9bn and Dixons' is £1.87bn
Carphone's 2,037 stores worldwide and Dixons' 947 stores will overlap and synergies will result in annual cost cuts of at least £80m within three years.

Previous retail mergers
Think about the troubled history of retail unions (see Alex Lawsons’ article in the Independent for details) so far:
- Abortive Carphone - Best Buy European joint venture in 2008
- Asda's doomed merger with furniture specialist MFI in 1985
- Morrisons’ takeover of Safeway in 2004 took longer than expected to bed in..
- The Co-op – Somerfield larger store sell-off
- Asda's acquisition of Netto in 2010, sell-off of 25% stores
- Kingfisher's troubled merger of B&Q with the French DIY retailer Castorama in 1998
- Kingfisher’s attempted a merger with Asda in 1999, resulting in Walmart bid

NAMs have to ask themselves if the Dixons-Carphone merger has enough potential to survive, or is even worth the effort…

Meanwhile, the Walgreens-Boots takeover appears to have a number of advantages
- Geographically complementary in that Walgreens is US only, Boots is rest-of-world
- Broadly complementary business philosophies and product assortments
- Potential synergies re retail expertise exchange
- Purchasing synergies already realising $154m

However, the real advantage over previous retail unions arises from the two-step deal (i.e. part–purchase in 2012, final takeover by 2016) which was designed to allow Walgreens and Alliance Boots to come together gradually and integrate, while continuing to drive their independent strategies in the first years of collaboration…

Sometimes slow is better, even in FMCG retailing…

Mega-mergers, the unintended consequences.....

Given the rising trend of companies combining forces to optimize scale, reduce tax and drive complementary R&D resources, it is perhaps useful to explore some of the unintended results of such moves.

The key issues with mega-mergers apart from economic have to be the impact on trading partners and also the political implications.

Because of competition legislation it is inevitable that the merger process will be delayed while the authorities explore the potential impact on markets.

For instance, the Publicis-Omnicon merger, announced last July with the deal's closing delayed at least six months because of regulatory issues, has already resulted in the loss of more than $1.5 billion of client work and they face a fight to retain billions more, including a huge Samsung contract, just as the two advertising firms struggle to keep their merger on track.

Client losses already include Microsoft, Danone, GSK, Sony, and Marks & Spencer.

Another consequence has to be the inevitable loss of talent, with the usual result of the best talent finding it easier to move...

Again, high US taxation is causing major American firms to combine foreign mergers with relocation of the combined headquarters to more benign tax environments, such as the Pfizer-AstraZeneca, Chiquita-Fyffes, and a host of other similar deals.

The immediate consequence will obviously be the inevitable moves as the US authorities attempt to apply international pressure to frustrate or delay such potential losses of corporation tax, resulting in more delays
Again the unintended consequence of good staff leaving to avoid career uncertainties in what is a short life, after all...

However, for those on the perimeters, opportunities abound...

In other words, apart from the new availability of good talent, such mergers will provide bargains in terms of brands that become a problem in terms of competition legislation, and a sell-off at any price becomes increasingly attractive...

Watch carefully...

Safeway-Albertsons merger as a way back to the UK?

Last night’s NamNews of a merger resulting from demand issues in the US economy could impact UK and EU markets...

The merger continues the consolidation that has changed the US landscape for traditional supermarket operators amid greater competition from upscale chains such as Whole Foods Market, warehouse club operators like Costco and retail giant Walmart.

Apart from the classic understatement by Albertsons chief executive Bob Miller to the effect that the ($60bn) size of the new outfit would improve its bargaining position with suppliers, the real issue is how long it takes for Safeway-Albertsons to seek growth abroad, to compensate for flat-line demand at home?

In which case they would join a trend begun by Walmart-Asda, continuing with Walgreens-Boots, followed by McKesson-Celesio, and who knows, CVS-A.S. Watson in a UK-centric move to Europe…?

And given that Safeway have  been here already, might it be worth considering a Safeway-Albertsons-Morrisons move for starters…?

What if: Pepsi and Kraft merge?

The recent stake-building in Pepsi and Mondelez – formerly known as Kraft Foods - by Nelson Peltz, one of America's best-known corporate raiders, presents several possible outcomes… These range from passive strategic shareholding, to forcing Pepsi to split its business along the lines of the Mondelez split into global snacks and Kraft grocery, to a full-blown merger of the two companies.

Given that Peltz, in the current climate, is well-known in the shareholder community as a fearless activist investor willing to agitate for strategic change and take on company boards, we can rule out passivity, whilst the Pepsi demerge option would seem like an intermediate step….

From a category impact point of view, it is probably best to explore the implications of a possible £112bn merger…

Key will be the usual pricing and terms disparity issues, causing post-merger delays as the new company works through the detail of the resulting implications at the supplier-retailer interface.  Any differences will require the negotiation of a rationalised set of trading terms and conditions, dealing with a trade that wants to go for the lowest common denominator ( and appropriate compensation for ‘immovable’ terms) within an over-riding desire to simplify their overall trading relationship with the company.

At global level, this may extend to global retailers wanting to deal with ‘one face’, a challenge to the differing account management structures in each company, apart from the additional complication of the involvement of bottlers in the Pepsi trade-mix, at global, regional and country level….

A key concern for some retailers may be resulting size of its new supplier… This means that some of the major multiples may attempt to reduce their level of dependence by creating new/increased alliances with other suppliers in the categories, with obvious impacts on different brands.

Obviously, category members will drill down to explore specifics in terms of changes in relative competitive appeal, government-forced disposals of over-lapping brands and the resulting changes in category dynamics, seeking opportunities at each stage in the merger process…

On balance, given the above ‘distractions’, quite apart from the potential issues with governments at global, regional and local level, a possible merger would appear to represent more opportunities for the competition than gains for Pepsi-Kraft, at this stage…

Hopefully, Mr Peltz can be persuaded that the potential negative impacts will outweigh possible gains in shareholder value from a forced merger, in these already over-complicated times……