Boots, Alliance to Create $23bn Healthcare Mammoth

Boots Group Plc, owner of the largest U.K. drugstore chain, will merge with Alliance Unichem Plc in a stock transaction to create a company with sales of more than 13 billion pounds ($22.9 billion) as supermarkets grab sales.

Boots investors will own 50.2 percent of the new company, to be called Alliance Boots, and shareholders of Alliance Unichem will hold the rest. Boots said it will sell its over-the-counter medicines unit, worth as much as 1.75 billion pounds according to analysts, and return more than 400 million pounds to investors.

Boots Chairman Nigel Rudd said the transaction will help the companies reduce costs and lower prices. Nottingham, England-based Boots has said profit will fall for a second year amid competition from the likes of A.S. Watson & Co.'s Superdrug and Tesco Plc. Alliance Unichem, Europe's second-biggest drug distributor, has increased earnings and sales by buying drugstores across Europe.

"This gives us a really good chance to internationalize the group's brand," Rudd said in an interview. "It is actually a merger of equals. It genuinely is. The two groups have very, very different skills but complementary skills."

Boots shares rose as much as 7.2 percent to 652 pence in London and were at 650.5 pence at 8:13 a.m. local time, valuing the company at 4.72 billion pounds. Alliance Unichem jumped as much as 5 percent to 910 pence and was at 904 pence, giving the Weybridge, England-based company a value of 3.26 billion pounds.

Fixing Stores

Analysts including Richard Hyman, who covers the U.K. retail industry as head of Verdict Research in London, have said that Boots may need to return to its roots as a health-care expert to compete with supermarkets.

"Ultimately the fundamental problem is that Boots is about everyday toiletry and health-care products, which are widely available in food stores, and all of Boots'customer have to shop at those food stores," Hyman said Oct. 1.

On Sept. 29, Boots said it is less confident about achieving its full-year sales forecast after revenue fell for a third quarter. Baker, 43, said on a conference call that day he can no longer commit to his March forecast that sales at stores open a year or more will at worst be unchanged.

Shares of Boots fell 3.3 percent with the forecast, the steepest drop in seven months, as the company joined U.K. retailers such as Next Plc whose sales are waning as consumers spend less.

``There's just too much floor space and they don't really know what to do with it," said Gary Dugan, chief investment officer of Barclays Investment Services in London, which manages about $50 million for private clients. Alliance Unichem's executives ``bring a skills set that will help Boots turn around its stores on the High Street."

International Expansion

``One of the big things that attracted the Alliance Unichem people was the Boots brand," Rudd, 58, said in the interview. ``This gives us a really good chance to internationalize the group's brand."

Boots has tried and failed to expand abroad before. The company abandoned plans to become a pan-European retailer in 2000 after three years trying to use the Netherlands as a bridgehead to enter Europe. Boots sold its 17 Dutch outlets to Royal Ahold NV in favor of an agreement to supply merchandise.

Boots then turned its attention to Asia, announcing plans to add outlets in Thailand, Japan and Taiwan, as well as entering new markets. In 2002, the company said it would close 19 stores in Thailand and Taiwan, and instead extend a program of opening sections in other retailers' outlets.

Alliance Unichem

``I'm a little skeptical about this kind of deal; I don't see who would benefit," Richard Perks, a retail analyst at Mintel International in London, said on Oct. 1.

Alliance Unichem on July 28 said first-half profit rose 39 percent to 104.9 million pounds and sales rose 3 percent to 4.61 billion pounds, as it added more retail pharmacies.

Alliance Unichem also said in July it bought most of Spain's Centro Europeo de Reparto Farmaceutico de Cataluna SA for about 15 million pounds to increase its market position in Barcelona and the Balearic Islands. In February, it bought some logistics operations from Galenica Holding AG, and agreed to buy Northern Ireland's biggest pharmacy chain, Bairds, in May.

Boots' plans to sell the Boots Healthcare International non- prescription medicines unit, are ``on track," Baker said last week. The auction of the unit is now in its second round, he said. Boots has said it expects to complete the sale by the end of March. The price may reach 1.75 billion pounds, Investec Securities analyst Matthew McEachran said in a note last month.

Reckitt Benckiser Plc, GlaxoSmithKline Plc and Bayer AG are among possible buyers of the unit, the FT reported Sept. 2.