Inflation falls at last – but the damage has already been done

 
Allister Heath
AT last, Britain’s inflation problem is abating. Prices are still increasing too quickly – inflation remains at 3.1 per cent on the retail price index and 2.8 per cent on the consumer price index, painful as wages are growing far less quickly. But the direction of travel is reassuring. The Bank of England – by luck rather than by skill – has been saved by the collapse in oil prices, among other factors. But let’s not forget that since 2005, prices in the UK are up 22.8 per cent. Since 1987, they are up 142 per cent. Since November 2009, just 31 months ago, prices are up 9.6 per cent – the pound in your pocket has lost a tenth of its value, a true scandal. Sure, inflation is finally slowing – but that won’t reverse the cumulative effect of the failure of the past two and half years. Price stability – what price stability?

HOW BOOTS WENT RIGHT
SO they pulled it off. Stefano Pessina, the Italian tycoon, who gambled everything on a massive leveraged buyout (LBO) of Alliance Boots at the height of the credit bubble, with the help of private equity giant KKR, has made a fortune for his co-investors. Those who said the deal would collapse in a heap of defaulted debt – the LBO happened in 2007, when punch drunk lenders were fighting to hand over cash to borrowers with no strings attached – and destroy private equity’s reputation have been proved wrong. Pessina has shown himself to be one of Europe’s foremost retailers and a great builder of businesses and turnaround expert.

Another man also helped resuscitate Boots and delivered huge returns for his own investors – Richard Baker, the former COO of Asda who now works for Advent, the private equity firm, and chairs DFS, Virgin Active and a range of other assets, including the Nectar card.

He saved Boots when he took over as CEO in 2003, was instrumental in the merger with Pessina’s Alliance Unichem (itself built out of hundreds of acquisitions) in 2006 and only departed the firm when it was taken private at an exorbitant price, delivering strong returns to investors in the then FTSE 100 company.

Before Baker took over, the firm was in decline; it was trying to be a general retailer with stores in the wrong place and all sorts of other problems, including antiquated IT and inefficient factories. It had even been overtaken by Lloyds Pharmacy.

To many, Boots looked finished. But the business was turned around, a vast collection of smaller shops rebranded as Boots and the company bounced back. The growth continued under Pessina and KKR’s leadership, as the private equity firm immortalised in Barbarians at the Gate proved to be a good custodian and the Italian tycoon an excellent executive chairman.

So for once a good news story, rather than the usual tale of woe, failure, hubris and disaster, and a good old fashioned mega-deal. There are a few caveats: it would have been nice had the Swiss-based Alliance Boots been the acquirer, rather than the seller. Walgreens is not exactly a great success story back home in the US. Some will be depressed by the fact that Pessina ruled out a float in London.

But those folk worried about a US takeover of the UK high street should relax: protectionism is never the right answer. Wal-Mart owns Asda and there have been no problems; Alliance Boots was already a global firm. This is a business story as they should all be: huge numbers, famous brands, buccaneering, colourful characters, City financiers, Barbarians made good and a bubble-era deal fuelled by insane cov-light lending that actually went right in the end, against all the odds.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath