£7bn merger of chemists' chains gets surprise OFT clearance

The £7.3bn merger of Boots and Alliance UniChem to create the biggest chemists' chain in Britain with one-fifth of the market was given a surprise go-ahead yesterday by the competition authorities.

The Office of Fair Trading ruled that the deal could proceed provided the companies overcame local competition concerns by getting rid of 100 of the 2,300 outlets they will own in the UK. Boots and Alliance UniChem had been ready to sacrifice as many as 350 stores to gain regulatory approval.

Shares in the two companies rose on the unexpected clearance. Most observers had assumed that the OFT would refer the merger to the Competition Commission for a full-blown investigation, and the two companies were braced for at least a temporary block on their tie-up.

The OFT coupled its approval for the deal with a renewed attack on the lack of competition in the pharmacy market, which the Government ruled last year should continue to have protection to prevent closure of chemists' shops in deprived or remote areas of the country.

John Fingleton, the chief executive of the OFT, said: "There remains a strong case for the Government to reconsider the costs to consumers of maintaining these disproportionate restrictions to competition in the retail pharmacy sector."

He said, as things stood, the £100m in cost savings Boots and Alliance UniChem expect to achieve from the merger might not be fully passed on to consumers in the form of improved service.

The companies hope to complete their all-share merger by late summer, subject to shareholder approval and agreeing detailed undertakings with the OFT on store disposals. The deal is expected to lead to about 2,000 job losses, mainly at head office level.

The merged company, Alliance Boots, would have sales of £13bn and 19 per cent of the pharmacy market. Boots shareholders would emerge with a 50.2 per cent majority stake in the company while Alliance UniChem's outlets, which trade as Moss pharmacies, would be rebranded under the Boots name. The next biggest player would be Lloyds with a 12 per cent market share.

The OFT ruled that the 40 per cent share of the wholesale distribution market that the merged company would command was not an issue since 19 per cent of that was accounted for by the medicines which the companies supply to themselves. UniChem's 21 per cent share of the wholesale market to supply other chemists would not change as a result of the merger as Boots does not supply other chains.

Expectations that the all-share deal would be referred had led to speculation of a possible counter-bid for Boots from private-equity firms with Apax, CVC Partners and Texas Pacific said to be considering a joint approach.

Shares in Alliance UniChem rose 2.6 per cent to 882.5p, valuing the company at £3.2bn, while Boots shares put on 9.5p to close 1.4 per cent higher at 684.5p, valuing it at £4.9bn. However, the group has just completed the £1.9bn sale of its Strepsils to Nurofen manufacturing division Boots Healthcare International to Reckitt Benckiser and is due to return the proceeds to shareholders this week.

The top two jobs in the merged company will go to Boots' directors with Sir Nigel Rudd becoming chairman and Richard Baker chief executive. But observers say the real power in the combined group will be in the hands of Stefano Pessina, the founder of Alliance UniChem, who will hold a 16 per cent stake and the post of executive deputy chairman.