Baker has the prescription for success with shiny new Boots

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Richard Baker fulfilled his ambition of "putting the chemist back into Boots" yesterday when the retailer pulled off its merger with Alliance UniChem to create Britain's biggest chemist chain and a new force in the European pharmacy sector.

In a sign that the new group Alliance Boots means business, Mr Baker, the chief executive, said some of Boots' most popular products had gone on sale in 500 Alliance pharmacies yesterday morning. "That bodes well for the future," he said.

As tonics go, analysts believe that deciding to crunch the two companies together is a prescription for success when it comes to revitalising a flagging Boots, which is being squeezed by the supermarkets. In return, Alliance UniChem, which has a European-wide pharmaceutical wholesale business and retail chains across the UK, the Netherlands and Norway, will be better placed to benefit from likely regulatory changes in its main markets going forward. Being part of Alliance Boots will further diversify its earnings streams as well as bolstering its retailing credentials.

As analysts at Morgan Stanley put in a recent research note: "If the European pharmacy market deregulates, the opportunity to create the 'Walgreen of Europe' will emerge. We would argue that neither Boots nor Alliance UniChem was well placed to capitalise on such an opportunity. Alliance Boots, however, just might be."

Task one for Mr Baker is to get started on delivering £100m of annual cost savings from combining the two groups. Anxious to avoid the pitfalls that befell the UK's most recent retail merger, that of Wm Morrison and Safeway, Mr Baker is being careful not to over-promise what he intends to deliver. Yesterday he was sticking firmly to predictions that it would take the group four years to deliver its synergy goal of £100m a year despite estimates from some analysts that Alliance Boots could save up to double that amount without blinking.

The company expects to take two years to deliver the first £60m of its annual cost savings goal, with the remaining £40m taking a further two years to pull off. The biggest single tranche at £20m will come from cutting its corporate cost bill: there are advisers to fire, ex-directors' fees to bank and, eventually, other salaries to save. Two boards have already been whittled down to one.

So far, all Mr Baker is promising is to cut cost from the enlarged group's buying bill and supply chain. He has yet to factor in the quantum of so-called "sales synergies" from doing things like selling Boots' suncream brand Soltan in Alliance's smaller Moss pharmacy stores. Other synergies will come from re-branding the group's entire UK estate as Boots and using Alliance's European wholesale network to sell Boots' products to independent chemist chains across Europe. Because of long lead times and the need to license products in different markets, this will be the "third leg" of the group's combined strategy, Mr Baker said.

He stressed there would be "no big bang" in terms of integrating the two companies. "Our real priority is business as usual. We see the merger as providing an accelerator to the existing strategies of both businesses," he added.

To that end, Alliance Boots used yesterday to issue the last set of separate trading figures for Boots and Alliance UniChem. In a trading update covering the first three months of Boots' financial year, it said like-for-like sales had risen by 3 per cent across its chemists' chain. This was better than analysts had pencilled in and was boosted by around 100 basis points by the recent heatwave, which sent sales of suncream and hay fever products soaring, the company said. Total sales of health-related products rose 5.9 per cent, while beauty and toiletries sales climbed by 3.7 per cent.

Interim results from Alliance UniChem showed pre-tax profits to 30 June had slipped to £130m.6m from £137.3m on revenue up 4.3 per cent at £5.8bn. The inclusion of £4.1m of fees relating to the merger knocked the profit number; the group reported its habitual double-digit rise in earnings excluding exceptional items.

Since the two companies unveiled their merger plans in October, they have largely won round an initially sceptical City. Shares in Alliance UniChem closed at an all-time record on their last day of trading, while Boots' stock ended at a seven-year high. Mr Baker, too, appears to be firmly ensconced in the chief executive's seat despite early warnings that his days were numbered given the presence of Stefano Pessina, who built up the old Alliance group and remains the biggest shareholder with a 16 per cent stake, as executive deputy chairman.

On paper, the two men have entirely different roles. Mr Baker will oversee the day-to-day operations of the combined group, while Mr Pessina will busy himself with strategic matters and finding new acquisitions. And that's how most analysts seemed to regard the top two executives yesterday. Matthew McEachran, at Investec Securities, said: "Stefano genuinely spends most of his time overseas meeting operators in other territories they don't trade in, which says a lot about his priorities." Simon Irwin, at JP Morgan, said: "They have different skill sets - Baker is a retailer and Pessina is a pharmacy man - and the new business has elements of both so in many respects they are very complementary."

Personality clashes aside, analysts believe the main risks to a healthy future for Alliance Boots lie in its integration not proceeding according to plan, unforeseen regulatory interventions from European governments seeking to cut their spiraling medical bills and the prospect of wounded rivals fighting back.

Shares in the new company eased 20.5p to 786p as investors took stock of the challenges that lie ahead.

Mr Irwin said: "You have to be worried about integration risk with any merger." But he drew solace from the fact that out of the new group's top 100 managers only one opted to leave in the run-up to the deal completing.

Mr Baker added: "If we can get the attitude and mentality of people [inside the organisation] right, that goes some way to mitigate the risk of putting everyone together."

With the group's wider geographic reach and the fact the company has more firepower when it comes to doing new deals, analysts believe the new company will be better insulated from the risk of unexpected regulation.

Meanwhile, Mr Pessina will keep searching for new foreign retailers and wholesalers to buy. That means Boots' old investors can expect to earn less in dividend income as more of the company's cash will be spent on acquisitions, but in return the enlarged group will actually grow rather than decline like the old Boots.

The one market that is firmly off the agenda is the US, despite Boots' attempts to crack it via distribution deals with the drugstore CVS and the discount retailer Target. "To go there and be a minnow player would be a kind of suicide," Mr Pessina said. After all, he has his 16 per cent stake in Alliance Boots to think about.

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