City sceptical of Boots deal

The proposed£7 billion merger between Boots and pharmacy giant Alliance UniChem came under fire from the City today, as the competitiveness of the group was called into question.

The goal of the merged company, Alliance Boots, is to create an international pharmacy-led healthcare group. However, Seymour Pierce analyst Richard Ratner said of the union: 'To us, this seems a short-term win situation, but, in our view, will be unlikely to solve the major problem - how to compete with superstore operators.'

Boots has borne the brunt of the supermarkets' success in recent months, with players such as Tesco selling more toiletries and over-the-counter drugs than pharmacies.

The merged company will aim to penetrate the international market further, by combining its global assets. Alliance UniChem has 300 outlets in Europe, while Boots has 100 pharmacies in Thailand and Ireland.

However, Evolution Securities analyst Nick Bubb added that simply merging the retail operations 'seems a bit of a sledgehammer to crack a nut, as most of Alliance is about drug wholesaling across Europe'.

Alliance UniChem reported that the merger could deliver pre-tax cost savings of at least£100 million by the fourth financial year to March 2010. It is hoped that streamlining the group purchasing and rationalising corporate costs will help achieve this.

However, some shareholders have also raised concerns. Today's Financial Times claims Boots' second-largest shareholder, Templeton, is seeking clarification of the long-term benefits.

The announcement has fuelled speculation that 1,000 Boots employees could lose their jobs as a result of the merger, although the exact figure is still unknown. Boots is also expected to move its headquarters from Nottingham to London.

Shares in Boots rose 4 per cent yesterday and it has been suggested that the City is preparing for the possibility of third-party bids, providing a more appealing offer for shareholders.