Lloyds Chemists cancels backing for Gehe offer

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The Independent Online
Lloyds Chemists, the pharmacy group which is the subject of a bid battle between Unichem and Gehe of Germany, withdrew its recommendation of Gehe's offer yesterday. The decision follows Unichem's increased pounds 617m offer for the company last Friday.

Unichem has trumped Gehe's cash offer by 5 per cent with its cash and shares deal though Gehe is still expected to come back with a higher cash offer of up to 500p per share.

Unichem's chief executive, Jeffrey Harris, welcomed the Lloyds' announcement. He said: "Our offer represents nearly 500p per share to most of Lloyds Chemists' institutional ordinary shareholders. This is an excellent opportunity."

Both bids will be closely scrutinised by the competition authorities, with the Unichem bid being examined by the Office of Fair Trading while Gehe bid will be subject to European law as it is a cross-border takeover bid.

However it is believed that the OFT is attempting to extend its jurisdiction beyond the UK in this case and put the Gehe offer under the microscope too.

Both the OFT and the Department of Trade and Industry declined to comment yesterday though the DTI said that in theory it was possible to make a case for certain takeover bids to be examined in the sphere of influence where they would have most impact - in this case Britain. However, the DTI did not confirm that it had asked Brussels to surrender the Gehe case to the OFT.

The European Commission confirmed on Friday that it was seeking comments on the Gehe bid as a matter of routine.

As Unichem's offer is final, the next step must be taken by Gehe, which could either beat or match the Unichem offer if it decides to continue. Matching the Unichem offer may be enough as Gehe's is an all-cash bid while Unichem's is a mix of cash and shares.

However, as the battle intensifies analysts are concerned that the balance sheet of the eventual victor will be stretched by the deal. Unichem's gearing would rise to 135 per cent, though the company says this would fall sharply due to cash generation and the disposal of unwanted parts of the Lloyds business such as the Holland & Barrett health food chain. The company says it has already had expressions of interest.

There are also concerns that if Gehe wins the battle it is more likely to join Asda in taking an aggressive stance on the discounting of over- the-counter medicines, which are currently protected by a price fixing agreement.

Any extension of discounting would place further pressure on independent high street chemists.

Lloyds Chemists shares, fell 2p to 493p yesterday.

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