Germans to pounce if Boots is broken up

Celesio, the German owner of the Lloyds pharmacy chain, will not bid for Alliance Boots but hopes to purchase its drugs distribution business from the winning suitor.

"They've got the money. They're waiting to pay if there is an offer to break it up," said a source close to the company.

The Boots board unanimously accepted a £10.6bn bid from buyout firm Kohlberg Kravis Roberts and deputy chairman Stefano Pessina last Friday. In response, Terra Firma, the investment vehicle founded by financier Guy Hands, teamed up with HBOS and the Wellcome Trust to table a higher, £10.9bn conditional offer. The Terra Firma team will meet Boots management this week and is understood to be ready to move quickly on a firm offer if it finds nothing unexpected during due diligence.

Both offers are far higher than the £9.7bn that KKR and Mr Pessina first came up with last month. The rapidly rising price has led some to question whether it has already gone beyond sensible levels. "This thing appears to have lost all touch with reality," said a banker. "They are going to have to put up some absolutely storming results to make this work."

For now the board supports the KKR bid. The firm has structured its offer as a scheme of arrangement, meaning that fewer investors have to agree for the deal to go through. This approach will also save it around £50m in stamp duty. KKR has yet to reach an agreement with Boots pension trustees over how much money it will inject into the group's fund. The firm will continue talks in the hopes of reaching an agreement.

Celesio, previously thought to be considering its own bid, has made initial soundings about acquiring the wholesale distribution business from the winner, though neither bidder is understood to be keen to sell.