Boots prepares for post merger shopping spree

Boots’ move to reduce all its £500m worth of net debt may be an attempt to
position itself for an acquisition spree following the Alliance-Unichem merger.

The pharmaceutical and beauty retailer reported a disappointing 9.6% drop in
trading profits to £163m for the six months to 30 September 2005 last week, but
added that, by the end of the next financial year, net debt would be reduced to
nil from the £500m reported last week.

There has been intense speculation about the reasons for the move, with some
analysts saying that it showed Boots’ intention to free up cash for acquisitions
in anticipation of its £7bn merger with AllianceUnichem, scheduled for
completion next year.

‘Boots is aiming to become more acquisitive and needs to strengthen its
balance sheet to do that,’ said Teather & Greenwood analyst Sanjay
Vidyarthi. ‘AllianceUnichem will also come with debt and Boots will need to
prepare for that.’

Steve Davies, retail analyst at Numis, said that following the merger, Boots
would direct cash towards pursuing acquisitions suited to the AllianceUnichem

‘The aim is for Boots to generate cash that will be used to bolt on more
acquisitions to AllianceUnichem.’

But a debt advisory expert at one of the Big Four firms said that the
decision to reduce debt levels could reflect a cautious outlook for trading over
the coming months.

‘It could have a lot to do with the whole retail sector’s desire to have low
gearing at the moment. Trading is down and retailers are unlikely to need
capital to expand, so why pay interest on debt you do not need,’Davies’ adviser

Boots is also eager to maintain a strong credit rating ahead of the merger.
The group said it planned ‘to operate with a strong investment grade credit
rating’, – another reason behind the plan to pay down debt.

Vidyarthi said, after the sale of Boots Healthcare International to Reckitt
Benckiser for £1.93bn, Boots needed to lower its debt to maintain a robust
credit rating.

‘Boots Healthcare International was cash-generative and after it was sold it
was important for Boots to reduce debt and maintain the credit rating it
needed,’ Vidyarthi said.

But Davies said that part of the reduction would have been prompted by
trading patterns. It was not unusual for retailers to increase gearing to access
stock ahead of the Christmas period and then lower their debt burden after
December, he added.


Security business reassures market after sudden drop in share price, and bus
company vows to recover growth

Medical technology group Smith & Nephew has decided to use
US dollars as its reporting currency, rather than pounds sterling, from next
January. Smith & Nephew said that the international spread of its business
had prompted the change. About half of the company’s revenues and operating
assets are in US dollars, which exposes the group to currency movements.

, the safety, health and technology group, is changing the
presentation of its segmental results. The group will now report under the
sections of infrastructure sensors, health and analysis and industrial safety.
Halma said it was introducing the changes, which will take effect when it
reports interim results in December, to improve transparency and communication
for stakeholders.

Surveillance and security business Croma was forced to
issue a stock exchange announcement last week, after a sudden drop in its share
price from 4.1p to 3.2p. Responding to the drop, the group reiterated that it
had enjoyed ‘robust’ trading in the first quarter of its financial year, with
like-for-like turnover 191% up. The group added that operating losses had been
cut by 96.8% from £220,000 to £7,000.

Tellings Golden Miller, the bus company, is in the process
of reorganising its business and slimming down the overhead base of its
remaining business to improve margins. In June, the group sold off its London
bus division for a profit of £16m. The group said its reduced size would
negatively impact on profitability, but added that it was planning to grow the
business again after restructuring.

Scapa, the adhesives manufacturer, has benefited from its
transition to IFRS with a reduction to its pre-tax loss. The overall impact of
adopting IFRS was to decrease full year 2004/05 pre-tax loss from £4.9m under UK
GAAP to £3.6m under IFRS. This arose as a result of reduced goodwill
amortisation of £1.4m, net of other adjustments, totalling a charge of £100,000.

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