Pessina bets his Boots on a bright future

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For a man who less than two years ago invested £1.27bn of his personal fortune in a consumer-facing company that is now having to trade through the worst recession in a generation, Stefano Pessina seems surprisingly relaxed.

In fact, as he takes his seat in the boardroom of Alliance Boots’ headquarters, perched above his flagship Boots health and beauty store on central London’s Oxford Street, the 67-year-old entrepreneur seems to be actually looking forward to talking about how his £15bn retail and drugs distribution business has fared through the financial crisis before of the publication of his annual review next month.

Run through a mental checklist of potential pitfalls around Alliance Boots and you might think Mr Pessina’s easy demeanour is a bit of bravado.

After all, as he surveys his 20-country empire, he does so nursing a conviction that these are the worst economic conditions he has endured during his near four-decade career.

Then there is the balance sheet, still saddled with £8.7bn of debt following his £12.4bn buy-out (together with private equity firm Kohlberg Kravis Roberts) of the FTSE 100 company in 2007.

It has been left with staggering finance costs – this sum ran to £853m last year – to service at a time when cash flow from the retail tills of his 2,600-strong chain of Boots chemists and beauty stores could be threatened by the downturn.

Add to that a “very difficult year” for his £9.5bn wholesale business, a requirement to pay a €300m bond back next month and another tough trading year on the British high streets in 2009, and Mr Pessina could be forgiven for privately feeling a little blue.

Instead he is upbeat, having delivered a “satisfactory” year in group profit and sales in spite of the economic headwinds. His wholesale business is “more or less” in positive territory – it delivered trading profit up 16 per cent to £200m in 2008. This is in spite of enduring “one of the worst years” Mr Pessina has ever seen, as the regulatory environments across the 15 markets in which he distributes drugs moved against him.

His retail business, which includes 2,600 stores across the UK and another 700 pharmacies dotted across the world, had “a very good year on the whole”.

“I would say retail is not as bad as we thought,” he says.

“At least we have been pleasantly surprised by our sales,” he adds, before conceding that “this recession will go on for some time. I am not even sure that we have seen the bottom.”

The main reason he is able to feel so relaxed is the timeframe attached to the buy-out. When KKR and Mr Pessina signed the Alliance Boots deal, they did so on the understanding that this was not going to be a quick private equity turnround and exit.

Mr Pessina again stressed that he and his backers are in for the long-haul and as such will withstand a couple of rough years.

He points out that while the debt burden is heavy, the bulk of the loans do not mature until 2014 and 2017 and the €300m (£271m) Eurobond that matures next month will be paid down from cash flow.

The deal was also done on the understanding that KKR will not receive any dividend payments for “many years”.

“If we paid out dividends we would have to reduce our growth or limit our growth and this would damage the business in the future,” he explains.

“We will continue to work as a private company for many years.”

He has also got some respite from punishing interest payments on the back of falling interest rates.

“Maybe the return – if the conditions are tougher – will be one year later, but if we are able to grow the business to create more value, of course the return will be there.”

Mr Pessina says that he will not be dramatically cutting capital expenditure across the group in the face of the downturn. Having promised to invest £1bn in Alliance Boots in the three years from acquisition, Mr Pessina invested £285m capital expenditure in the year to March 2008, much of this going on refurbishing and the rebranding of the Alliance Unichem pharmacy chains to the Boots brand.

He also spent £184m on acquisitions. “We have invested quite a lot of money this year and will continue to invest next year because we have done deals to grow and to create new opportunities.”

Mr Pessina acquired Depolabo, a leading provider of pharmaceutical pre-wholesale and contract logistics services in France; a 90 per cent stake in Megapharm, a specialised German distributor of oncology products; and Central Homecare, a provider of home healthcare services in the UK.

Organically, he is testing whether the Boots brand – already big in Thailand and the Republic of Ireland – can gain a foothold in the Netherlands and Norway, while also rebranding the wholesale business from Alliance Unichem to Alliance Healthcare.

And in the face of the credit crunch, he still has appetite for “transformational deals” should they come along.

Far from treading water awaiting calmer times, Mr Pessina says he will definitely try to snap up Phoenix, the German drug wholesaler that is part of the faltering empire of Adolf Merckle, should the family decide to sell the business. The future of the company is in doubt following the suicide in January of the German billionaire.

Buying Phoenix, valued according to reports at €4bn, would be another enormous deal for the multi-billionaire. But the challenge does not seem to daunt him. “I would be ready to invest with KKR,” he says.

“We, the shareholders of Alliance Boots, could buy it without consolidating it into Alliance Boots. If the family decide to dispose of Phoenix we will be, for sure, interested. But we have never made an offer for the very simple reason that for the time being, Phoenix is not for sale.”

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