It’s proved tough to sell one of the staples of Britain’s beleaguered High Street, tough as old Boots.
Public ‘buyers’ are now reportedly sought, practically as buyers of last resort, after private equity takeover talks broke down, with an IPO potentially eyed to bring back the soap-n-smellies retailer to the stock market.
The past few weeks of profit warnings for UK retailers hardly bodes well for Boot’s American owners.
For the company’s 51,000 UK employees and, perhaps more pertinently, its prospective new shareholders in London, the question is now surely what does the future hold for Boots?
History of Boots
But, before looking forward, let’s quickly look back.
Around since the 1850s, the retail store is practically an ever-present staple of the British high street.
Selling everything from make-up and beauty products, over-the-counter treatments, ointments, prescribed medicines, deodorant, and chicken sandwich meal deals all the way to three-for-the-price of two Christmas gift bundles.
Yet, despite its long history and deep product diversity, it seems no potential buyers are willing to pay what the American sellers will accept for the business.
Walgreens Boots Alliance, a holdings company and the operator of a high street chain, abandoned a £5.5bn auction for the company blaming ‘conditions in the global financial markets.’
Boots received only one binding offer in the sales process, coming from a consortium of Apollo Global Management (NYSE:APO) and Reliance Industries, which was subject to the venture securing the necessary financing for the buyout.
Walgreens, the American parent company, meanwhile deems the British business to be non-core.
Nevertheless, shares in Walgreens fell by nearly 4% to US$40.98 since yesterday when the news first broke.
Tepid interest
The auction, which started earlier this year, was said to have attracted a number of private equity firms, though they were merely rumoured to be interested in a deal.
In January Bain Capital and CVC Capital were reportedly readying a £10bn bid, while the brothers that own Asda, Zuber and Mohsin Issa, were also said to be interested in Boots for a similar price.
However, none of those materialised. Instead, a £5.5bn offer was on the table and even that failed to garner support from financiers.
So, what’s the problem?
Boots’ problems stem from two main issues, according to industry pundits.
Firstly, and what Walgreens cited in its statement, is that current market conditions are causing potential investors to sit on their hands. There have certainly been simpler times for someone to stump up a few billion quid for brick-and-mortar retailers.
The war in Ukraine has seen volatility and uncertainty spike in capital markets, though the daily rotation of headlines measuring inflation and fears of economic stagnation does nothing at all to help.
Boots’ second major problem is much more fundamental and more deep-rooted.
The retailer is suffering from an “identity crisis”, according to Julie Palmer, a partner at corporate restructuring firm Begbies Traynor (AIM:BEG)
“I think it’s sort of a positive and a negative, in the sense that it wears two very different hats,” Traynor said.
“If you go into one of the Boots stores, you leave wondering whether they are a pharmaceutical business or a retail business.”
“At the moment, one would argue that they are a retailer in terms of the percentage of what they do, and I think that has made it difficult for them.”
A lot of this difficulty stems from current market conditions, where retailers tend to suffer more than most in times of economic downturn.
What can be done?
Palmer points to how WHSmith went through a similar situation and focused on its travel business to maximise margins, and argues a similar reflection is needed by Boots if it is to be appealing once again for a takeover as and when market conditions improve.
Perhaps that might have been the intention of any possible buyer, but likely Walgreens will have to make that decision to push through the sale.
What next?
Clive Black, analyst at broker Shore Capital reckons Walgreens finds itself between a rock and a hard place.
“This is the worst of all worlds- a parent who does not want to own you,” Black said.
“It’s difficult to see how Walgreens can commit to ambitious plans for Boots. The store estate is underinvested and the website is pretty naff.”
“I can’t imagine they’re going to open up the chequebook and capitalise a business they don’t particularly want.”
“New ideas, new perspectives and new capital is probably what’s needed.”
New capital may be arriving into Boots and Walgreens, not via a takeover, but rather a listing of Boots as a way to spin off the company.
Earlier this year, Ornella Barra, one of the owners of Walgreens, hinted that an initial public offering (IPO) may be an option.
“At the beginning we had the idea of an IPO, but we didn’t start the process because the offers came in,’ she told the Daily Mail.
At the time, Barra refused to rule out an IPO for the firm, however, saying “everything is on the table.”
“If the offers (from private equity bidders) are not in line with our expectations we could come back to an IPO.”
However, Palmer argues attempting to list now would be a “bold move.”
“There’s currently a lot of negative sentiment on the retail side, but then a positive on the pharmaceutical side.”
“I would say it would be a bold move at the moment for an IPO with so much nervousness across the market generally, and particularly in retail.”
As the auction that lasted nearly six months draws to a rather flat conclusion, Walgreens finds itself in a situation where it has a business it doesn’t want, but arguably needs to reinvest in if it’s going to get rid.
The next few moves will be key in the future of Boots.