Jeremy Warner's Outlook: In the UK, Boots has nowhere to go but down. That's why the Alliance merger makes sense

Cable industry finally comes of age; Hancock bids a humiliating farewell
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The Independent Online

A second way is that this is an elaborate way of putting Boots in play and flushing out that long-awaited private-equity takeover bid. But perhaps the better way is simply what it says in the press release, that this is a cost-cutting merger of equals to create Europe's leading retail pharmacy business with greatly enhanced international growth prospects. Far from trying to belittle the strategic bind Boots finds itself in, this merger may provide some sort of a solution.

Opinion in the City yesterday was divided roughly equally between all three. Yet I can't help thinking the first explanation too sceptical. No one denies the strategic problems facing Boots. From a position where the company had the highest margins in retailing, there was really only one way to go once the big supermarket chains decided fully to engage in the health and beauty care market. The margins at Boots were indefensible. To prevent market share from being ripped to shreds, Richard Baker, the chief executive, was forced to cut prices faster than he could cut costs.

His fault was in being too optimistic, or rather, allowing his then finance director, now departed, to over-promise on his behalf. As a consequence, it has been just one disappointment after another. As for whether the purpose of the deal is to flush out a private-equity bid, Sir Nigel Rudd, the chairman, has yet to receive even the vaguest of interested phone calls.

Nothing can be ruled out, and it might indeed be the case that Alliance provides the trigger for all that pent-up number crunching finally to be released. Yet to me this seems rather unlikely. The most likely explanation for private equity's silence thus far is that venture capital has no better idea what to do with Boots than Mr Baker. The business could be run more aggressively for cash, but trashing the company's long-term future for such a short-term gain is a strategy of despair.

If Boots has nowhere to go in the UK - other than what it might gain from the Government's promise to give pharmacies a bigger role in the provision of public health - then it may make sense to use the brand to expand internationally.

Stephano Pessina, the chief executive and creator of Alliance UniChem, has been trying to bend the ear of Boots management on this for at least five years. While he's forged ahead, Boots has stagnated and declined, so he's now able to bring about his alliance from the perspective of equal partner. To many, this looks like a nil-premium takeover of Boots rather than the merger it pretends to be. How different it might have been had Boots listened when he first came knocking.

The deal is by no means in the bag yet. Quite apart from the possibility of interlopers, the merger has big competition hurdles to surmount. Lloyds Chemist for one is already screaming blue murder over the combined 40 per cent share of the wholesale, pharmaceuticals distribution market that Boots and Alliance combined will have. Though nearly a half of this share is accounted for by Boots itself, there will have to be safeguards to prevent abuse. The opportunity to squeeze competitors is all too obvious.

Yet on the whole, the deal seems to work, despite its potentially unstable management structure. The strategic bind Boots finds itself in isn't cured by this merger, but it does provide the company with some kind of a way forward, as well as yielding a useful £100m of annual cost savings. The most compelling reason for thinking it worth backing is Mr Pessina, whose 32 per cent of Alliance UniChem becomes 16 per cent of Alliance Boots.

The purpose of this deal from his perspective is not the suspected one - to provide the liquidity to realise his investment. In fact, he's no intention of selling any time soon, and if Mr Baker proves the dud some in the City already think him, then there is a first class operative with one hell of an incentive to succeed to step into his shoes. Mr Pessina's continued involvement in the company is a boon, not the formula for boardroom friction that some fear. It will keep Mr Baker on his toes.

Cable industry finally comes of age

It's been a long time coming, but finally Britain's beleaguered cable industry is to be united in just one company, regulators allowing. The Thatcher government made a mistake when back in the mid-1980s it decided to fragment the award of cable franchises to a multiplicity of sub-scale local operators.

If cable had been just one company from the start, it might have stood some chance against the twin monopolists of British Telecom and Rupert Murdoch's BSkyB. Billions of dollars were wasted - fortunately most of it by American cable companies and their backers - building the networks then struggling fruitlessly to compete. The costs of customer acquisition were horrendous, and poor standards of service meant cable always struggled to retain the subscribers it won.

The long, painful and wretched process of consolidation eventually succeeded in creating just two companies - NTL and Telewest. Laid low by debt and the overexpansion of the bubble years, neither was equipped for survival.

Yet there was always a decent business in there somewhere struggling to get out. With both companies now refinanced and reasonably well managed, the time has come for the final consolidation. Sky, BT and others will complain to regulators again, but unlike the last big consolidation, which they managed to get referred to the Competition Commission, they are unlikely to get much joy this time around.

As with the creation of a single ITV, this merger needs to happen if a platform capable of providing real competition to BT and Sky is to be created. Just to make the position absolutely plain, Simon Duffy, NTL's chief executive, says it will be a deal breaker if cable is forced to open its networks up to all comers as a condition of the merger. BT is already under this obligation, but then it has quite a head start on cable.

Despite its traumas, cable has quietly been making significant inroads into the broadband, telepone and TV markets. Already NTL and Telewest combined have a million more direct broadband subscribers than BT Retail, providing a useful cushion against the expected decline of revenues from traditional voice telephony. Sky too has every reason to be concerned, for if thefuture of multi-media is interactive, then the cable platform is far better equipped to provide it than satellite.

The billions wasted on UK cable is sunk capital now. It is for others to reap the rewards. Prime among these is the New Jersey based vulture capitalist, William Huff, who bully though he might be, bet his shirt on driving through the refinancing and subsequent marriage. His tactics look set to pay off handsomely.

Hancock bids a humiliating farewell

So farewell John Hancock, the first high-profile victim of the downturn in retail spending. You should have done the decent thing when it became apparent a year ago that implementation of a new IT system had been badly mishandled. Instead you sacked your line managers to save yourself. Now you've had to suffer the humiliation of presiding over a 31 per cent collapse in orders. Justice is done.

j.warner@independent.co.uk

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