Britain's Alliance Boots on Monday rejected an approach worth 9.7 billion pounds ($18.8 billion) from private equity firm Kohlberg Kravis Roberts, saying the offer undervalued its prospects.
Alliance Boots said in a statement the offer did not reflect "the fundamental value of the company or the attractive prospects, opportunities and synergies available to Alliance Boots following the very recent completion of its merger."
Shares in Alliance Boots, created last year from the merger of health and beauty retailer Boots and drugs wholesaler Alliance Unichem, were unchanged by the news and remained 7% higher on the day at 997 pence, just below the 1,000 pence KKR had indicated last Friday it was prepared to offer.
KKR was joined in making its offer by Alliance Boots's executive deputy chairman Stefano Pessina, who owns 15% of the company and helped mastermind last year's merger.
Alliance Boots said neither Stefano Pessina nor Ornella Barra, who is linked to Pessina, had attended the board meeting it held on Monday.
"I'm surprised they have rejected the offer so quickly without first going back and asking for more," said one person close to the deal, who requested anonymity.
Alliance Boots is the latest in a string of firms to attract the interest of cash-rich private equity firms, which are taking advantage of historically low interest rates to buy companies whose assets allow them to borrow heavily and whose strong cash flows allow them to pay off debt quickly.
"We think investors would be well advised to negotiate a higher price than 10 pounds," Bernstein Research's Luca Solca wrote in a research note.
"We believe a more fair price could be 10.60 pounds or higher," he said, saying the firm was likely to beat its merger cost-savings target of 100 million pounds and benefit from the easing of pharmacy ownership rules in continental Europe.
Retailers Attract Private Equity Bids
Investec Securities analysts, however, thought 1,000 pence a share was a fair price, and said the focus could shift to other retailers that might attract private equity bids, such as home improvements group Kingfisher, clothing, homeware and food retailer Marks & Spencer, and Home Retail, which owns the catalogue-based Argos chain.
"The 9-billion-pound-plus approach will mean everything else in the sector is perceived to be in play," they wrote in a research note.
Retailers, which often own extensive property assets, are drawing particular attention, and KKR is already part of a private equity consortium considering a bid for J. Sainsbury, Britain's third-biggest supermarket group.
The potential offer of 1,000 pence values Alliance Boots at 19 times projected earnings to March 2008, versus the U.K. food and drug retail sector's average of 20.6 times, according to Reuters Estimates.
Ratings agency Standard & Poor's said on Monday it had placed its BBB long-term corporate credit rating for Alliance Boots on its creditwatch list with negative implications.
"If a bid were to materialize and succeed, the anticipated largely debt-funded nature of the takeover and the resulting capital structure would likely not be compatible with the BBB rating level," S&P credit analyst Sunita Kara said.
Analysts said Pessina's involvement with KKR made a rival bid less likely. KKR and Pessina said on Friday they required a recommendation from Alliance Boots's board to proceed with an offer and that they would be able to complete their proposal three weeks after the full information was made available.