KKR’s death wish?
There are worrying signs of a serious marble deficiency at the world’s leading private equity firm, . Here’s why.
1) The two most substantial and resonant criticisms of private equity’s ownership of companies is that private-equity firms in general are too secretive and that they burden the businesses they buy with excessive debts.
2) So you would assume that Kohlberg Kravis Roberts, the irrepressible granddaddy of the modern private equity industry, would not wish to lay itself open to either of those charges when buying for around £10.6bn. After all, it’s a much loved British business, and deals with the NHS and almost all of us when we have a cough, a sniffle or something more serious. Oh, and it also employs 100,000 people who are all wondering if their jobs will be less secure as and when the takeover is completed.
3) I therefore expected that it would be easy to learn quite how much debt KKR is loading on to the business. Silly me. Apparently this is commercially sensitive information, which if released could be exploited by KKR’s rival in the contest to buy Alliance Boots. As someone who has been hanging around the City for more than 20 years, I regard that excuse as what my 10-year-old would call lamer than lame.
4) But, perhaps more relevantly, I took it for granted that KKR and its business partner, Stefano Pessina – the Monaco-based billionaire deputy chairman of Alliance Boots – would leap at the chance to be interviewed about their plans. They would obviously want to allay the legitimate fears of Alliance Boots’s many employees and customers and explain that their ambitions are actually to grow the company, rather than slash and burn it for a quick buck. But again I made a miscalculation. Neither Mr Pessina nor any KKR partner wishes to be interviewed for television or radio. So what was that about private equity’s new commitment to communicate better and become more transparent in their activities?
5) To be clear, I have nothing but respect for KKR’s and Pessina’s respective track records as uber capitalists. But their inability to recognise that now, more than ever, they need to build the trust of the wider public, in order to pursue their ambitions over the longer term, makes me wonder whether they’ve been out in this unseasonal sunshine too long.
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Robert - I am dismayed by your lack of appreciation of the financial world. "Silly you" indeed.
If you were looking to buy a house and entered into an auction - would you expect to tell all other bidders exactly how much you could afford to pay before you entered the auction room? I don't think so. So why should this be any different for private equity investors looking to buy a business?
Yes, private equity houses should display a greater level of social accountability. But do not confuse this with a necessity to adopt a ridiculous stance when negotiating to acquire a business in a competitive environment.
Agreed, some investments may have too much debt on their balance sheets. However, is this the fault of the private equity houses which provide equity, or the banks and other financial institutions which are competing to lend such levels of debt? I suggest a change of viewpoint may provide some interesting insights.
Robert, why don't you do some calculations of your own, and provide your readers with some valuable information. For example, how much do you reckon Boot's property portfolio is worth? More than 10.6 Billion? I'm pretty sure it is. As well as that, why not supply your readers with a bit of research about how the KKR's past acquisitions have fared. You are experienced, connected, and knowledgable, so that should be easy. There are literally hundreds of thousands of people in Britain that need to know about the future of Boots. I hope your "respect" for this firm does not blind you to the obvious possible negative possibilities of this buyout.
Mike Smith
Boots is absolutely the leader in pharmaceutical retailing in the UK (and some other countries too). They put any American chain to shame in terms of professionalism. They are the only local presence which one can rely upon to be able to supply prescribed products that need to be obtained from overseas. One will never encounter such unprofessionalism at Boots as refusal to stock the morning-after pill, which is common in the US.
Boots also have details of every item they have dispensed to any customer against a prescription, going back years, which they don't see as a problem because they regard themselves as being safe hands, but it would not necessarily be safe in the hands of American owners.
Kohlberg Kravis Roberts & Co, the American Private Equty firm involved has just bought the huge US data and payment processing company, First Data, who might find Boots' data very useful.
KKR also have major shares in Hospital Corporation of America, said to be the largest operator of private medical facilities in the world, who might well find the UK expertise of Boots' private medical treatment ventures useful, and the Gillette company, which not only sells something like 75% of the shaving products sold in the world, but also owns the Braun electrical and Oral-B personal products companies - all major lines sold by Boots, and competed against by Boots cheaper own brand products. It seems very likely that competition in many areas would be reduced after such a buy-out.
Unfortunately we know that dismantling the market leader in a field does not necessarily mean that others rise to fill the gap. Too often the general standards decline. Pharmaceutical retailing is far too important for that to be allowed to happen. I simply cannot imagine why an entriely "hands-off" approach is being taken in this affair by those charged with protecting public interests.
When somene says something like:
"their inability to recognise that now, more than ever, they need to build the trust of the wider public"
You have to wonder how they can survive for so long in a capitalist country without having the faintest understanding of capitalism.
why should KKR need public trust? What do you think they plan to do with it? KKR need one thing and one thing only, rich people who will invest money in them in the hope it will make them richer.
Peston seems to be living in a fantasy world where corporate raiders are required to have a concience, for reasons that he doesn't bother to state. He probably believes in Corporate Responsibility and the tooth fairy too.
Perhaps Peston's column has been hacked by a group of pinko Guardian readers? That would explain the recent lurch to the left and the comments in this column and recently on non-resident peers....
Just becuase KKR doesn't give the ³ÉÈË¿ìÊÖ interviews on their interal plans is no reason to think they have a death wish - in fact its the last thing I would want any PE firm I was involved in to do.
The key word in private equity is private, and there are reasons the industry is proving much more efficient at delivering value than public markets. They need to convince shareholders and the board of their approach, not gain the trust of the public.
i totally agree with your view regarding kkr and the other bloodsucking firms that follow their lead.its all about making lots of dosh to swell their own personal coffers and does nothing for these businesses long term other then load them with debt.i work for a company that has been under the threat of private equity vultures for the past 3 years and it does nothing but cause uncertainty with the company making short term decisions to counter any further approaches
hi i work for boots and at the moment the staff at boots would like everyone involved to tell us if are jobs are safe and they are not just going to sell bits off and get rid of the boots name like people are saying that is what will happen
Actually, Boots are more often tenants than owners and they sold off a lot of smaller stores in a structured sale and leaseback themselves a few years ago of £300MM worth of secondary towns High St shops with min and max RPI indexation. It sold off a very low yield, from memory somewhere in the 3-3.5% range. They do not own very much freehold kit. Look at Boots last balance sheet and property is listed at £1,267.9B. Assume it is worth c.50% more (because there is a massive real estate bubble about to burst but some fools out there still believe everything in Gordon's world is rosy!) and you come to a figure of £1.8B. Do an opco/propco structure and fool the banks (HBOS love these propco's) into thinking the lease rents should be higher because the business "can afford" a higher rent- adds up to £2.7B. Borrow 70%, say £1.9B. Admittedly all these numbers are Boots not Boots/Alliance but in this case (unlike Sainsbury's- and think about the OFT interference impact on those property values!!), miles off the company bid price.
"I'm delighted that the board has been able to achieve such a good price for shareholders."
Sir Nigel Rudd
Boots chairman
Surely all this private equity activity is a damning indictment on the performance of UK boards. In this case, Rudd says he has achieved a good price, but he must know only too well that there is more value in the business if PE companies are so interested in buying it. Are he and his fellow non-execs at Boots and elsewhere incapable of realising that additional value or just too lazy to do it?
Unfortunately Robert you and I and many millions of people in this country are very naïve about this sort of thing. We think that it is short-termist to buy up a succesful, 150 year old company that is a houshold-name healthcare provider in the UK with a reputation for honesty and integrity, and then load it chock-full of debt and sell-off all of its property assets, and anthing else they own that is bolted down, before probably securitising a load of future revenue streams and eliminating costs by firing loyal staff and sacrificing the quality of service and customer care, thus ultimately destroying its customer experience and brand loyalty, before a downturn in business sees its revenue and cashflows dry-up until it eventually can’t service it heavy debt load or pay its rent so it shuts down more and more marginal stores all over the UK, firing more staff and making more service cuts until it ultimately files for bankruptcy. I’m sure if it was that silly, then the highly paid investment bankers in The City would advise against it, as they are not at all short-term focused on hitting their sales targets so they can pay the mortgage on their third holiday home or pay their staff’s salaries and their wives’ pending divorce settlement. It’s not as if they see even more business ahead as they sell the debt on and securitise assets that they can sell to their clients before the company files for bankruptcy, when they can then buy the distressed assets from their unfortunate clients at discount prices to put in the bank staff’s pension pot. But then again, if you and I were smart enough to think this is constructive business, we would be paid millions to do this deal rather than the far cleverer people who are doing this kind of deal all the time. After all, they are in it for the long-term, it’s not like they will asset strip the company and re-float it on the stockmarket before it all goes belly up and disappear with all this cash, like they didn’t do with Debenhams. It’s capitalism, and we are all better off for it – until we have a recession. But that’s far too long term to think that way.
Another Jewel of British Industry sold to the highest bidder.
The company is already well run, we dont need someon to laden it with debt and then pay for that debt by cutting costs, selling off property and raising prices, especially not corporate US raiders!