M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Tuesday, April 24, 2007

KKR's Winning European Toehold

Alliance Boots Plc, a U.K.-based pharmacy chain and pharmaceutical wholesaler, yesterday endorsed an offer to be acquired by Kohlberg Kravis Roberts & Co.  KKR's bid group included Italian billionaire Stefano Pessina, who owns 15 percent of Alliance Boots.  The KKR-led bid beat out a rival consortium headed by Guy Hand's Terra Firma Investments which included Wellcome Trust and HBOS Plc.  KKR's final offer is an aggregate amount of £11.02 billion in cash or $22.07 billion dollars at yesterday's lofty exchange rate of £1=$2.002.

The offer is yet another "mega" private equity buy-out.  It is also yet another bid where private equity firms leaped into a competitive bidding situation.  In this day and age, neither is terribly new or particularly interesting, at least in this instance. 

But this is interesting.  The KKR group won the bid because of Pessina's initial toehold in Alliance Boots.  A toehold is a pre-offer stake in the target.  Here, the toehold was Pessani's shareholding.  And last Friday and Monday, the KKR consortium bought two large blocks of Alliance Boots shares giving them, together with Pessina's interest, total ownership or options to purchase 25.6% of the share capital of Alliance Boots.  This won the day for the KKR group.  The reason lies in the intricacies of the U.K. Companies Act which require that an acquirer who wants to use the target's assets as security for a leveraged purchase must own at least 75% of a target to squeeze-out the minority and initiate a "whitewash" procedure.  KKR's sizable shareholding made it impossible for the Terra Firma group to achieve this 75% threshold and consequently use a leveraged takeover structure.  This killed the Terra Firma group's bid. 

A very nice strategy and kudos to Merrill Lynch and JP Morgan Casanove who advised KKR on the bid and, based on a report in the Financial Times, presumably came up with and executed it.  Other bidders in the United Kingdom would do well to follow this strategy by pairing up with current shareholders or making significant open market purchases (though in the interests of full disclosure the strategy has yet to succeed for NASDAQ in its pursuit of the London Stock Exchange).  I emphasize the U.K. aspect here.  We don't often see toeholds through open market purchases in the United States because of SEC regulations which discourage them (not to mention the HSR antitrust waiting period). 


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