Recommended takeovers: Alliance Boots
23 August 2007
The continued boom in acquisitions by private equity houses led to the 11.1bn acquisition of Alliance Boots by AB Acquisitions, a special purpose vehicle formed jointly by the US private equity house Kohlberg Kravis Roberts (KKR) and Stefano Pessina, the executive deputy chairman of Alliance Boots.
Alliance Boots was the result of the merger of Alliance UniChem and Boots Group last year to create Europe's leading pharmacy-led health and beauty group. It is the first FTSE100 company to be subject to a private equity buyout and the largest recommended takeover in the UK so far this year.
This article focuses on three aspects of the bid the auction between KKR and a competing bidder; the use of a scheme of arrangement and the break fee and other benefits for the bidder on a recommended deal.
Obtaining the cooperation of the target companys board can be crucial for private equity bids. If the board is willing to cooperate, the bidder may be allowed to see confidential information about the target as part of a process called due diligence. If it is not willing, the offer may not proceed at all, as some bidders will not make hostile bids and banks are often unwilling to lend money to a bidder that has been unable to investigate the target. What is more, obtaining the backing of the target board may give the bidder other benefits such as break fees, rights to match and irrevocable undertakings.
The first decision a target board has to make is whether to open the books to a potential bidder or not. Once due diligence is complete the bidder has to decide its offer price and the target board has to decide whether it is prepared to recommend an offer to shareholders at that price, taking into account all relevant factors, and to decide what protections it is prepared to give a bidder.
In early March Alliance Boots shares were trading at around 8. The initial KKR approach on 9 March 2007 was at a price of 10 per share. This was rejected by the board of Alliance Boots but the announcement of a possible offer had put Alliance Boots in play.
KKR and Pessina increased their offer to 10.40 and on 30 March commenced a limited due diligence exercise.
In early April, Terra Firma, another private equity house, notified the board that it, together with others, was also considering a possible offer for Alliance Boots and requested access to the information provided to KKR. Under rule 20.2 of the Takeover Code, a target company that allows one bidder to do due diligence must make the same information available to other potential bidders. Following provision of information to the Terra Firma consortium, it subsequently suggested a possible offer price of 10.85 per share.
KKR reached agreement with Alliance Boots on the terms of a recommended offer on 20 April at 10.90 per share. Shortly afterwards Terra Firma announced a higher indicative proposal, subject to due diligence.
Alliance Boots announced that, while it would continue to recommend the KKR bid, it would also continue to provide high-level due diligence information to Terra Firma in order not to frustrate a potentially more attractive offer.
Terra Firma eventually conceded defeat on 24 April after AB Acquisitions, the KKR and Pessina vehicle, bought Alliance Boots shares at prices of up to 11.39. As the price at which the final shares were bought by AB Acquisitions was higher than the announced offer price of 10.90, AB Acquisitions was obliged to raise its offer price to 11.39 under Rule 6.2 of the Takeover Code.
Scheme or offer?
Takeovers of listed companies in the UK are generally carried out either by way of an offer or through a scheme of arrangement. The former is a simple offer by the bidder to each shareholder in the target company to buy the shares at the offer price. Each shareholder decides individually whether or not to accept, although the offer must be conditional on the holders of at least 50-plus per cent of the shares in the target accepting. A scheme of arrangement is a proposal by the target to its own shareholders to exchange their shares for the consideration offered by the bidder and requires a collective decision of those shareholders taken at a meeting of shareholders. Crucially, a scheme also involves the High Court no scheme can become effective unless it has been sanctioned by the court.
Which is the right route, an offer or a scheme, to achieve a particular takeover will depend on the circumstances. The key advantage of a scheme for a private equity buyer is that it guarantees 100 per cent control at completion. Schemes can also provide some savings on stamp duty. Because schemes are essentially proposals by the target company, they are generally only used for recommended offers.
The Alliance Boots bid was a cash offer (with a loan note alternative) made by way of a scheme of arrangement.
The mechanics of a scheme
Offers and schemes both start the same way, with a formal announcement under Rule 2.5 of the Takeover Code. Shortly thereafter a detailed document will be sent to all shareholders explaining what is proposed and what action they need to take. For a scheme this document will be prepared by the target company (rather than by the bidder) and must comply not only with the information requirements set out in the Takeover Code, but also with specific statutory provisions relating to schemes and with the general law on shareholder meetings. It should contain all relevant information that is material to the shareholders decision as to how to vote at the meeting. The Alliance Boots scheme document was 145 pages long; it would have been much longer if the consideration had been anything other than cash and loan notes, such as shares in the bidder.
A shareholder meeting to approve a scheme is convened on the authority of the High Court, so once the scheme document has been prepared the target company must seek the permission of the court to post it. There is then a three-week gap prior to the shareholder meetings. The Alliance Boots scheme document was posted to shareholders on 8 May and the shareholders meetings followed on 31 May.
A scheme will only proceed if the resolution is passed by the required majorities. There are two tests, both of which must be satisfied. First, at least 50 per cent of the number of shareholders who actually vote must be in favour (regardless of how many shares each shareholder holds). Second, shareholders in favour must hold shares representing 75 per cent by value of the shares in respect of which votes are cast at the meeting.
If shareholders approve a scheme, the target must then ask the court to approve it. Before doing so there will be a court hearing at which anyone who objects to the scheme may put their objections to the judge. The hearing is by no means a rubber stamp, but if the judge does approve then the scheme will become effective when the court order is lodged at the Companies Registry. Once approved by shareholders and sanctioned by the court, the arrangements are binding on all shareholders.
Court sanction and the pension fund trustees
A number of schemes have been challenged at the court hearing in recent years. In this case the arrangements between the pension fund trustees and KKR attracted a lot of press attention and at one stage it was suggested in the press that the trustees would go to the court hearing and ask the court not to approve the scheme.
The pension fund trustees were concerned that the amount of debt being borrowed by the bidder might impact on the ability of Alliance Boots to support the pension scheme, so they wanted to secure agreement on future funding arrangements. After much discussion, shortly before the hearing date the bidder and the trustees of the Alliance Boots pension fund were able to agree both increased cash payments and a security package. As a result the court did not have to consider whether the objections of the trustees would have meant that the court should not sanction the scheme.
Safeguarding the bid
Alliance Boots signed an implementation agreement with the bidder immediately before the issue of the 2.5 announcement. The agreement included various measures requested by the bidder in order to protect its bid. These included a break fee, which would be payable if the target board withdrew its recommendation of the offer from AB Acquisitions (which it might have done, for example, if a higher competing offer had been formally made) or if a competing offer were successful. The amount of the break fee was 1 per cent (the maximum permitted under the Takeover Code) of the value of the offer at announcement.
In addition, some bidders will seek an absolute prohibition on a target offering break fees to any subsequent potential bidders. Alliance Boots agreed to a limited version of this: it agreed not to pay a break fee to any other potential bidder unless the price offered by that bidder was at least 25p higher than the KKR offer of 10.90. The last indicative proposal by the Terra Firma consortium specified a possible price of 11.15 so had Terra Firma proceeded to a formal offer, Alliance Boots would have been able to offer it a break fee.
Alliance Boots also agreed to notify AB Acquisitions of any approaches from potential competing bidders and to provide certain details of such approaches.
Finally, the directors agreed to give irrevocable undertakings to accept the offer in respect of their own shareholdings.
Representing the target
Slaughter and May represented Alliance Boots during the takeover. Practically speaking, this role included advising the board on its duties in considering competing proposals and whether or not to recommend the formal offer; how to conduct the offer in accordance with the provisions of the Takeover Code and company law; and drafting the required announcements and documentation, including the scheme document. The firms competition, pensions and dispute resolution departments also played important roles. KKR and Pessina were advised by Clifford Chance.
Frances Murphy is a partner in Slaughters corporate department and Kyla French is trainee.
Break fees are arrangements entered into between a bidder and a target company whereby a fee is paid to the bidder if a specified event occurs that causes the transaction to fail, such as the board ceasing to recommend the offer or another offer becoming unconditional. The amount of a break fee is limited to 1 per cent of the value of the offer by the provisions of the Takeover Code.
Firm offer announcement Rule 2.5 of the Takeover Code
Once a firm intention to make an offer is announced, the bidder cannot withdraw unless the required proportion of shareholders does not accept the offer or another condition is not satisfied. An announcement should therefore not be made under Rule 2.5 unless the bidder has every reason to believe that it can implement the offer, including having access to the requisite funds. The announcement itself must contain the information specified in Rule 2.5.
The top 100 companies (by value) listed on the London Stock Exchange.
An agreement between the target and bidding companies that sets out certain terms specifying the way in which an offer will proceed. Although not a requisite agreement, in the context of a scheme of arrangement it gives the bidder some control over the acquisition process.
A binding agreement by a shareholder to accept a takeover offer.
Essentially an IOU from the bidder to the shareholder, loan notes are often offered by bidders as an alternative to cash in a takeover and can be attractive to individual shareholders as a method of deferring the capital gains tax liability on the sale of shares.
Possible offer announcement Rule 2.4 of the Takeover Code
Such an announcement is most frequently made in response to rumours or untoward share price movements. They are generally limited to brief statements stating that talks between a potential bidder and target are taking place and the bidder is considering making an offer and that such talks may or may not lead to an offer.
Drafted by the targets solicitors, this is the document that is sent to every shareholder in the target company and is required by statute and the Takeover Code to include certain information, including the effect of the scheme, the opinion of the directors, background information on the company and the bidder and notice of the shareholder meetings.
Special purpose vehicle
A company set up solely to achieve a set objective and commonly used by private equity houses when making acquisitions.