Boots left in limbo as bids fail to emerge

Boots is facing fresh uncertainty after its US owner abandoned plans to sell the business — but left the door open to a disposal once market conditions improved.

Walgreens Boots Alliance said this week that a review launched in January had concluded the US group should retain ownership of the UK pharmacy and beauty retailer for now.

Chief executive Roz Brewer told investors “the business should be good enough for us to retain as well as to look at strategic opportunities for it”.

She acknowledged that, despite initial interest in Boots from “about eight to 10 interested parties”, a downturn in financial markets prompted Walgreens to “slow this opportunity down”.

One banker with knowledge of the sale process said that, while market conditions were certainly a factor, the underlying condition of the UK-based chain had also put bidders off.

“The main reason they didn’t get the price they were after was that not enough people were interested — and once they got into due diligence, even those that were concluded [Boots] was more underinvested than they thought.”

Neil Saunders, managing director at GlobalData Retail, said the outcome of the review had left Boots “treading water”.

“No one is under any illusions that this is a temporary position and, given that, [Walgreens] are really not going to be investing a lot of money,” he added.

He thought an IPO — something that US group Walmart had planned for UK supermarket group Asda after its proposed merger with J Sainsbury was blocked — was also off the agenda given market conditions and the state of the business.

Brewer said Walgreens would continue to invest in Boots. “Our thinking is . . . the business is healthy, and we’ll continue to ensure that it remains healthy.”

She stressed that Boots’ performance was improving. Its market share is rising in all categories, particularly beauty where it has been helped by the demise of hundreds of department stores.

Online makes up 13 per cent of overall retail sales, double what it was before the pandemic, while same-store sales in the three months to the end of May were up 24 per cent as visits to its 2,000 stores rose.

“The execution of our transformation programme, and a sharp focus on expanding our key categories of healthcare and beauty, has driven strong sales and market share growth and further strengthened our position as the UK’s leading health and beauty retailer,” said Seb James, managing director for Boots in the UK and Ireland.

Boots has tightened pricing and improved its popular loyalty scheme to curtail market share losses to supermarkets and variety discounters.

And like its parent, it is venturing into primary care provision with prescribing pharmacists and an “online doctor” service. Though this strategy is not new, Boots argues the opportunity is now greater because of the scale of the challenges facing the NHS in the wake of the pandemic.

But detractors have said its tired and understaffed stores are damaging its reputation and that its online offering is still not best-in-class. Boots counters that much of the past three years has been spent fixing the infrastructure of the business and that customers will start to see more tangible improvements to the store estate.

“We had to spend a lot of time sorting out things like IT, product ranges and new brands first,” said one insider, who added that senior management now had more autonomy because of changes in strategic direction at Walgreens itself.

Even its critics acknowledge Boots has many strengths. “The business has so many attractions and there are so many levers it can pull,” said the banker. “But there’s also a lot of wood to chop and Walgreens has really just nibbled around the edges so far.”

There is also the question of Boots’ defined benefit pension scheme, which is adequately funded but nevertheless large in relation to the group’s underlying profits.

John Ralfe, who once oversaw the plan and is now an independent pensions consultant, said Walgreens had provided guarantees for the scheme that few financial buyers would want to assume and that The Pensions Regulator’s considerable powers of intervention in takeovers were a deterrent for some buyers.

Walmart injected cash into the Asda pension scheme before selling it to an insurer, clearing the way for TDR and the Issa brothers to acquire the supermarket and Ralfe believed Walgreens may have to do something similar.

Boots said it had a good relationship with the pension trustees and that the scheme was in a strong financial position.

Saunders concluded that the end of the sale process “isn’t the very worst position” for Boots and its 50,000 employees to be in and that the company was nowhere near the kind of financial distress that befell Debenhams or Arcadia.

But the lingering uncertainty “is certainly not great either”.