Although the banks have not yet been given a formal mandate, it is understood that Bank of America, Barclays Capital, HVB, JP Morgan, Merrill Lynch and Royal Bank of Scotland will be invited to underwrite the debt. The banks involved declined to comment.
KKR is bidding in concert with Alliance Boots’ executive deputy chairman Stefano Pessina, who owns 15% of the company. He is thought to be disappointed with the slow pace of integration since he sold his Alliance Unichem business to Boots in July last year.
EuroWeek also understands that the loan backing the transaction will be structured as a ‘covenant-lite’ deal and will be priced using a bookbuild process — the same way as a bond is priced.
The covenant-lite structure for leveraged loans waters down the financial restrictions usually placed on private equity funds in leveraged financings. Instead, they only have to satisfy bond-style incurrence covenants.
JP Morgan’s presence as one of the underwriters is significant. The bank has been the sole bookrunner on the only two other deals that have used the covenant-lite structure in Europe.
Four weeks ago World Directories announced that it would refinance much of its 2004 leveraged loan with a Eu975m covenant facility, led by JP Morgan, that would be priced using a bookbuild. Loan pricing normally stays fixed throughout the syndication process.
Then, a fortnight ago, JP Morgan was back with the first covenant-lite package for a fresh buy-out in Europe, to finance Apax Partners’ Eu1.35bn bid for 49.9% of trade publisher Trader Media Group.
Standard loan covenants force the borrower to maintain financial ratios at agreed levels, tested quarterly. Incurrence covenants merely prevent a borrower from obtaining more debt if it fails to comply with set ratios.
Some leveraged finance specialists in Europe have criticised the move to this sort of structure. "In the US, covenant-lite deals are used sparingly, and there are always lots of bonds behind them," said one banker not working on the Boots deal. The argument is that covenant-lite deals are acceptable if the loan is protected by a thick layer of less-senior bond debt.
"In Europe it seems that the sponsors are putting the banks under lots of pressure to achieve this type of structure, without much regard to how the debt is structured," the banker said. "These deals are classic bull market transactions."
KKR’s assault on Alliance Boots was challenged this week by Guy Hands’ Terra Firma Capital Partners, which is believed to have teamed up with the Wellcome Trust, the UK medical research charity, to mount a bid.
The KKR consortium has already been granted access to Alliance Boots’ books and Terra Firma is expected to gain the same access soon.
The Wellcome Trust is now Britain’s biggest investor in private equity funds, with around £6bn in private equity, venture capital and hedge fund assets. It is the world’s second biggest charity.
Market participants remarked on its appearance as a direct investor in an LBO, rather than going through a fund. Direct investment would save Wellcome money on fees, but it is also probably no coincidence that its first direct deal is in a pharmacy and drug distribution business, where its special knowledge may be of particular use.
Despite the possibility of a rival bid, bankers close to the KKR camp were confident of its success. "I think there is an 80% chance of a sponsor-led deal for Boots succeeding," said an official in London. "And I also think it will be KKR and Pessina that win out — any other consortium is going to have to go a lot higher to succeed."
Alliance Boots’ share price rose by 1.5% to close at £10.50 on Wednesday, on the news that Terra Firma was set to launch a bid, and closed at the same level yesterday (Thursday).
Since March 30, KKR and Pessina have been offering £10.40 a share. Their initial £10 bid, which valued the group at £9.7bn, was rejected earlier in the month.
The company’s share price has risen from 689p on April 13 last year. On March 9, when the LSE confirmed KKR was bidding, the share price was 850p.
Alistair Dawber
