Filling my Boots? I know we are paying our taxes
To some he is the alchemist who rescued the high street chain, to others he is short-changing Britain. Stefano Pessina breaks off from a global expansion drive to tell James Ashton he has nothing to hide
Stefano Pessina is nonplussed by my suggestion. If the scrutiny of clever tax planning dogs Alliance Boots, the pharmacy and drugs wholesaler controlled by the Italian billionaire, why not just give away a billion, like the Microsoft co-founder Bill Gates, to prove that the money doesn’t matter?
“It won’t go away,” he says of the criticism that Alliance Boots doesn’t pay its fair share after redomiciling from Britain to Switzerland following its 2007 private-equity buyout. Even the beneficiaries of such philanthropic largesse aren’t always grateful, he believes. “I can tell you I have been at dinners when I have heard people in charities criticising Bill Gates very strongly because he wanted to decide what to do with his money in the charity.”
Still, it might help Mr Pessina’s cause. The empire he sits atop, straddling 25 countries with 370 drug-distribution depots and more than 3,000 health and beauty shops, is a testament to his success – but still the tycoon, worth £5bn, divides opinion. To some, he is a corporate alchemist who rescued an ailing Boots from becoming just another high street casualty. To others, his steady deal-doing has feathered his own nest and marks him out as the worst form of barbarian at the gate.
Certainly the snowy-haired Mr Pessina, 72, is driven, coming to prominence in the City when Boots combined with his comparatively little-known drugs distributor, Alliance UniChem, in 2006 after he wooed managers with dinner on board his luxury yacht. For him, it was one deal among many that has taken a small Italian firm inherited from his father to the brink of a combination with Walgreens, the American drugstore chain, and restless attempts to crack China and Brazil.
But back to tax.
“I would be surprised if you didn’t ask about tax,” Mr Pessina says with a rumbling laugh 45 minutes into our chat in his boardroom above a Boots store on a rainy Oxford Street in London. “I am not embarrassed at all because I know we are paying our taxes in all the countries where we operate.”
Such an answer doesn’t cut the mustard with his critics, including the charity War on Want and the Unite trade union, which attracted plenty of attention by claiming that the owner of Boots had dodged £1.2bn in tax in the last six years. The company’s retort was that it is paying 50 per cent more in cash taxes in Britain now than when Boots was last a stock market-listed company. That £320m annual contribution includes corporation tax, business rates and employer national insurance.
“To be honest, everything started when we had a very big debt and, of course, we were paying less tax,” said Mr Pessina, referring to the years after the company, backed by the private equity group KKR, borrowed billions to fund its buyout and took advantage of tax relief on the interest paid. He also pointed out that the banks’ profit from such a set-up helped the Exchequer even if Alliance Boots was paying less.
“If you work with your own capital and you don’t have the capital of the banks, they will not make their money – they will not pay taxes. What the banks have done in the UK, this is not part of the discussion. It is not our fault if they have not used the interest that we have paid to them in the right way.”
As this debate has raged, it is clear that Alliance Boots has prospered. Footfall might be down, but British consumers are not as afraid to spend as they were three years ago, Mr Pessina reports. However, they have developed a bargain-chasing mindset. More resilient in a downturn has been the company’s distribution arm.
While other bosses might preach caution during such tricky economic times, Mr Pessina has ploughed ahead. A year from now, Alliance Boots could be wholly owned by Walgreens when the American group exercises a put option to buy the 55 per cent stake in the business that it doesn’t already own. The paperwork is already being prepared.
Mr Pessina explains how the two years since the deal was first struck have been about familiarisation. That has involved swapping executives and striking joint buying plans to save millions. What really interests the avowed non-retailer, though, is what Boots and Walgreens can learn from each other.
There is a subtle fit: Boots makes most of its money in the front of the store, selling beauty goods such as No7 and Botanics. By contrast, Walgreens profits more heavily from pharmacy and healthcare products, which are typically in the back.
“Walgreens has invested more in pharmacy than Boots – it has better software and better services,” he said, referring to vaccinations and simple blood tests. “We will have to increase the number of services that we offer to our customers.”
And while that work goes on, Mr Pessina is still casting around the world for new opportunities, such as in China, where Alliance Boots’ wholesaling joint venture, Guangzhou Pharmaceuticals, quietly bolts on a small acquisition every month.
Creating a pharmacy chain in China occupies him now, since ownership barriers have been reduced. But he bristles a little when I ask if something might come off there this year.
“Listen, I worked on the US for 10 years and I was not able to do anything. In one year, we have two big agreements in the US. I worked for five years to do something with Boots – I saw three chief executives, three different chairmen – and at the end I was able to do this deal in three weeks [although] it took an eternity for anti-trust [approval].
“So it is difficult to predict. In Latin America, I was almost certain that we had an agreement at least twice, and in the end, due to the results of due diligence, we had to give up. We could be able to announce three deals this year or nothing. I can tell you we have a very long pipeline of potential deals.”
It is statements like this that suggest the Monaco-based Mr Pessina won’t fade from corporate view when the Walgreens deal goes through.
Stefano Pessina: The drug of acquisition
Stefano Pessina trained as a nuclear engineer before his father persuaded him in the mid-1970s to help shake up the family’s small drugs distributor. It became a drug, you might say, as fixing one firm led to fixing others that he rolled together before taking his acquisition spree into France and Britain.
Separated from his wife, Barbara, he met his long-term partner, Ornella Barra, who runs half of Alliance Boots, when he acquired her business in Italy. Today he lives in Monaco, where he sails, collects art and thinks about what to do next. He has two children and four grandchildren.
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