Americans Target British Businesses

LONDON -- The U.K.'s biggest corporate event this week is news that giant U.S. pharmacy chain Walgreen  (NYSE: WAG  ) has bought a 45% stake in British rival Alliance Boots.

Walgreen goes global
On Tuesday, Walgreen announced that it paid $6.7 billion for a 45% stake in Alliance Boots, owner of two of the biggest brands on British high streets: Boots the Chemist and Alliance Pharmacy.

Together, these two companies have a long and illustrious history, as Henry Boot opened his first pharmacy in 1849. Combined, they are the leading health and beauty group in the U.K., with more than 116,000 employees, 3,330 stores (including 3,200 pharmacies), and operations in 25 countries.

In October 2005, the merger of Boots and Alliance UniChem was announced, with the deal completing in July 2006. The merged group was then itself taken over in a 12.4 billion pound buyout in April 2007. Since that date, the group has been owned by Kohlberg Kravis Roberts -- one of the world's leading private equity firms -- and Alliance Boots executive chairman Stefano Pessina, a 71-year-old Monte Carlo-based Italian billionaire and former majority shareholder in Alliance.

American ambitions
Walgreen -- America's biggest pharmacy chain with nearly 8,000 drugstores and sales of $72 billion last year -- paid $4 billion in cash and $2.7 billion in shares for a 45% stake in Alliance Boots. This values the entire equity of the target at $14.9 billion.

However, the American Goliath's ambitions don't stop there. Within three years, Walgreen may exercise an option to buy the remaining 55% of Alliance Boots for $9.2 billion, made up of $4.9 billion in cash and Walgreen shares worth around $4.6 billion on Tuesday. At such time, Walgreen would also take on Boots' net debt, which stands at about 7 billion pounds.

Thus, by any standards, this is a big deal. Indeed, adding up all the amounts that Walgreen would need to pay to take full control of its British rival, the U.S. group is looking at a total price tag of $27.2 billion. This is a massive sum, but it's easily funded from the U.S. drugstore chain's enormous cash flow.

Down goes Walgreen
When Alliance Boots was created, market pundits feared that it was a pricey, top-of-the-market merger that relied too much on debt and leverage. However, given the full price offered by Walgreen, KKR and Pessina look to have made a tasty profit on their investment. Despite the subsequent credit crunch and global recession, the current owners of Boots could, by 2015, double or triple their original equity investment made in 2007. That's a decent return, given the global financial turmoil of the past five years.

Then again, shareholders in Walgreen may not be so delighted with this deal. On Monday, before it was announced, Walgreen shares closed at $31.96. Last night, they closed at $29.21, down 8.6% in 48 hours. Hence, the shares KKR and Pessina were given are already worth significantly less than they were prior to the deal being announced. Ouch.

The American invasion
This is merely the latest in a long line of U.S. takeovers of U.K. firms that stretches back decades. Indeed, there has always been healthy mergers-and-acquisitions activity between our two countries, partly driven by our common language, shared Anglo-Saxon capitalism, and broadly similar financial markets.

For example, in August 2011, U.S. computing behemoth Hewlett-Packard  (NYSE: HPQ  ) launched an $11.7 billion bid to buy U.K. software firm and FTSE 100 member Autonomy Corporation. Autonomy shareholders grabbed this cash with glee, thanks to the 2,550 pence offer price being pitched 64% above the firm's share price before the deal was announced. However, it remains to be seen how successful HP's takeover of the Cambridge-based firm will be after Mike Lynch, Autonomy's founder, left HP last month.

Furthermore, when U.S. food giant Kraft Foods  (NYSE: KFT  ) launched a 10.2 billion pound bid for famous British chocolate company Cadbury in September 2009, it led to a trans-Atlantic war of words. Eventually, Kraft won Cadbury for 11.5 billion pounds in March 2010, but then reneged on promises not to close several British factories.

What's more, there was more U.S.-U.K. M&A news this week when the share price of FTSE 250 engineer Invensys yesterday soared by almost a third to close at nearly 270 pence, up 67 pence. Alas, shares in Invensys slumped by 16% this morning to 215 pence after the firm confirmed that it had "been in highly preliminary discussions with third parties" about possible transactions. However, these discussions -- including "a highly preliminary approach" from Emerson Electric  (NYSE: EMR  ) -- are no longer ongoing.

Four U.K. targets for U.S. firms
Following the Boots-Walgreen news, I poked around the FTSE 100 to find firms that would be a good fit for cash-rich US rivals. Here are four that I found.

1. AstraZeneca
With a market value of 35 billion pounds, AstraZeneca -- the U.K.'s second-largest drug-maker -- might be a good fit for U.S. giant Johnson & Johnson (NYSE: JNJ  ) . Right now, Astra trades on a forward price-to-earnings ratio of just 7.4 and a dividend yield of 6.8%, covered 2.1 times. What's more, this would be a "clean" deal for J&J, as Astra -- unlike almost every other FTSE 100 firm -- has net cash.

2. Rexam
As well as being the world's biggest can-maker for food and drinks, Rexam also supplies plastic packaging to the health-care, pharmaceutical, personal care, and household care markets. When I last reviewed Rexam's results in February 2011, I gave this dull company a big thumbs-up.

With a market value of 3.6 billion pounds, I believe this FTSE 100 firm would be an ideal meal for Berkshire Hathaway, investing genius Warren Buffett's conglomerate. Buffett loves market leaders in boring businesses (he has bought brick, carpet, and roofing companies), so I'm certain Rexam would be an ideal piece to add to Buffett's jigsaw.

3. BAE Systems
Despite being Britain's leading defense business, BAE Systems has a market value of less than 9.5 billion pounds, trades on a forward P/E of just 7.2 times, and offers a prospective dividend yield of 7%, covered 2.1 times.

Surely, BAE would be a steal for a giant American defense contractor such as Lockheed Martin? On the other hand, the U.K. government's "golden share" in BAE -- plus the requirement for the group to have a British chief executive -- could deter even the friendliest foreign bids.

4. Sage Group
Always the bridesmaid and never the bride, Sage Group has watched as countless other European software businesses have fallen into the arms of deep-pocketed U.S. competitors. In the past, Sage has been linked to deals with the likes of Microsoft and other high-tech giants, but it remains independent.

Nevertheless, with a market cap below 3.5 billion pounds, a forward P/E of 13.4, and a prospective dividend yield of 4.2%, covered twice, surely Sage would be a nice fit for the likes of Larry Ellison's Oracle Corporation?

Speaking of billionaires and FTSE 100 firms, which U.K. business has Warren Buffett been aggressively buying into in 2012? To find out which big British brand the Oracle of Omaha is backing big-time, simply download your free copy of our latest report: "One UK Share That Warren Buffett Loves."

Which FTSE 350 firms do you think are the most likely candidates to attract foreign (or domestic) bidders in 2012? Please let us know in the comments box below!

More from Cliff D'Arcy:

Cliff does not own any of the shares mentioned in this article. The Motley Fool owns shares of Lockheed Martin Corporation Com, Johnson & Johnson, Microsoft, Berkshire Hathaway, and Oracle. Motley Fool newsletter services have recommended buying shares of Emerson Electric, Berkshire Hathaway, Microsoft, and Johnson & Johnson. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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