Alliance/Boots tie-up: will it work?

Boots CEO Richard Baker "has a habit of springing surprises on the City", said Matthew Goodman in The Sunday Times. This week, instead of a disappointing trading statement, he announced a £7bn merger with rival chemist Alliance Unichem. The resulting entity, Alliance Boots, would be Europe's leading retail pharmacy business, with a network across 11 countries and turnover of £14bn.

It certainly works for Alliance Unichem, said Martin Dickson in the FT. It gains access to Boots's strong brand name and bolsters both its retail and wholesale businesses. And Boots gains growth potential outside its home market, courtesy of Alliance Unichem's European operations. Boots should also benefit from the enlarged group's greater buying power, helping it to combat supermarkets, said Camilla Palladino on Breakingviews.com. Moreover, Alliance's community-based pharmacies and European operations will reduce Boots's exposure to the high street.

But Boots is now taking on another 900 stores, said Nils Pratley in The Guardian. That seems to be asking for trouble: the supermarkets have already halved the operating margins it achieves in its high-street outlets. Plus the timing of the tie-up with a major wholesaler "may just turn out to be awful" as Alliance is already "feeling a chill wind" from the Government's efforts to reduce prices on medicines.

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And the new board structure "is a disaster in the making", said Anthony Hilton in the Evening Standard. Alliance's Stefano Pessina, who will own 17% of the combined firm, will be made deputy executive chairman, while Richard Baker stays on as CEO. This constellation led to a huge bust-up at Royal & Sun Alliance when it was last tried, and there is scope for conflict here, too. Pessina, who has spent his life building up Alliance, and is in charge of implementing the merger, is hardly likely to let Baker do anything he disagrees with. "Sceptics can already hear the rattling of the collection for Baker's farewell present," said Patience Wheatcroft in The Times. This deal may be a harbinger of high-street consolidation, said Palladino. Traditional retailers have been buffeted by Tesco and other low-price retailers and have consequently all decided to add cheaper retail space to gain economies of scale and thus recover the lost margin. But now that the market is sluggish, "there aren't enough customers to go round" and profitability is suffering. The corollary of all this is rationalisation: a "glut of deals after Christmas" is on the cards for the sector.