April 29, 2012 10:49 pm

Alliance Boots out to cement its position

Stefano Pessina is feeling a little under the weather.

The fierce air conditioning that was a feature of his recent travels in US has left him with a nasty cold.

But the executive chairman of Alliance Boots, who turned 70 last June, says he has no intention of slowing down.

“The fact I have a cold today doesn’t mean that my health is very weak, and it doesn’t mean that I have decided not to work any more,” he says.

At the point when many other executives are contemplating retirement, Mr Pessina has his sights set firmly on another “transformational deal”, of the type he has struck roughly every 10 years.

This would cement the position of Alliance Boots as a truly global company, just five years after he acquired it with private equity group Kohlberg Kravis Roberts in a £12.4bn deal. Not only is it ready, but the global financial crisis has created opportunities for strong companies.

“For us, being a global company is ... not wishful thinking, it’s a project,” he says.

To complete this project, he acknowledges that sooner or later, Alliance Boots must expand in the US.

“If we want to become global, sooner or later we will have to do something there,” he says.

Rumours have abounded in recent weeks that Alliance Boots is in talks with a US company. Some industry specialists believe a logical tie-up could be with McKesson, the US pharmaceutical wholesaler.

Mr Pessina refuses to talk about specific companies.

But he says he continues to talk to all parties in the market that might be prepared to sell or merge.

While the US is an obvious hunting ground, Mr Pessina is also keen to expand in China, and Latin America.

“We believe that the future will belong to the global players, and to be global you must be in the US, you must be in South America, you must be in Asia more generally, but specifically China,” he says.

He points out that a “transformational deal” could be a merger, a partnership or an arrangement where the parties combine their buying power.

Could a deal also be a route to an exit for Mr Pessina and KKR?

“It could be for my partners if they wanted, but not for me,” he says. “Whatever we will do I will stay with the company, at least as a shareholder.”

He believes KKR is in no hurry to exit.

“Their average investment is seven years, but they have been 11 to 12 years with the same investment in the past,” he says.

Some people who know the company believe it will be unlikely to pursue an initial public offering until Mr Pessina has struck another big deal.

Mr Pessina believes KKR will remain relaxed “provided that we continue to grow and pay back some of the debt”.

Alliance Boots is expected to continue its record of delivering double-digit growth in sales and trading profit, which excludes goodwill and exceptional items, in the year to the end of March. More than half of this will come from expansion.

It is also continuing to reduce debt, helped by the £1bn-plus in cash it throws off each year. Last year it cut net debt by £546m to £7.8bn. The reduction is expected to be bigger in the year to March 2012.

It could pay the £1bn or so that is due in 2014 from internally generated cash flow. It must refinance £5bn before June 2015, with another £1bn due in 2016, and £800m in 2017.

“When we will decide to refinance it, we will not have any difficulties,” says Mr Pessina.

He and KKR will again not pay themselves a dividend again this year.

But progress at Alliance Boots has included controversy.

Last year, the group incurred the wrath of pensions experts, after it wrote to 9,000 pensioners offering them an immediate increase in their pensions, in exchange for giving up future rises in line with inflation.

Only about 10 per cent have accepted the offer. However, Mr Pessina defends the exercise.

Alliance Boots had not sought to “cheat” anyone, and had provided information and independent financial advice.

He also rails against critics of the group’s tax arrangements. It moved to Zug in Switzerland in 2008, and in the year to March 2011, enraged tax protesters by paying a tax bill of £59m on pre-tax profit of £637m.

“The atmosphere in this country is becoming more and more negative for the companies, which is not good for the UK,” says Mr Pessina.

The tax bill in the year to March 2011 reflected the additional £246m investment in the UK pension schemes, its borrowings and past losses, and the tax bill will be higher this year.

Alliance Boots has also invested almost £1bn in the UK since being taken private.

“We have tried to keep alive ... our factory in Nottingham. It would have been much easier for us to shut down everything and go somewhere else. We have not done this,” says Mr Pessina. “We would hope to have fair treatment. I don’t ask for any privilege. Just a fair treatment in this country.”

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