News & Analysis

GMB switches attack to Alliance Boots

Kohlberg Kravis Roberts’ £10.1 billion bid for Alliance Boots, potentially the largest European buyout to date, has become the latest deal to attract the ire of the UK-based GMB trade union, private equity’s most vociferous opponent.

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The GMB, a UK trade union, has launched its latest broadside on the private equity industry, after criticising Kohlberg Kravis Roberts’ ongoing bid for UK health and beauty chain Alliance Boots.

Boots: stores are under threat, the GMB claims

The union, whose attack on buyout firm Permira incited much of the recent opposition to the industry in the UK, has called on the government to delay the prospective £10.1 billion deal on the grounds that Boots cannot support such heavy debts without closing “hundreds” of its high street stores.

The GMB cited yesterday’s IMF report, which warned that the large-scale collapse of private equity-backed business is increasingly likely. It believes UK government ministers Patricia Hewitt and Alastair Darling should use their powers to delay the deal, in order to ask Boots how it will support the level of leverage required.

The £7 billion of debt that KKR will need to raise from banks to fund the deal will generate interest payments of about £500 million per year, the union said, assuming an interest rate of about 7 percent. Since Boots’ estimated profit for its last financial year was about £480 million, the union believes it will not be able to meet these payments without closing “hundreds of their local pharmacies, which have served local communities for many years”.

However, banking sources told PEO that the union’s argument was wide of the mark. “Lenders make credit decisions on the basis of a company’s historic cash flows over the last 12 months – which in this case would include the cash proceeds from all of Boots’ high street stores. It is ridiculous to suggest KKR would meet its interest payments by shutting down the sources of this cash flow. Banks wouldn’t lend this kind of money if they couldn’t meet their coverage ratios,” said one.

In the same statement, the GMB also reiterated its opposition to the tax deductibility of interest payments, arguing that Boots’ corporation tax bill would drop from about £144 million to zero. This meant the British taxpayer was effectively subsidising the deal, the union claimed.

So far the UK government has refused to bow down to sustained union demands to review the tax treatment of interest payments.