Health and beauty group Boots Plc is to buy Alliance UniChem Plc to create a pan-European drugs retailer and distributor with 3,000 stores and more than £13 billion in sales.
Although the two were at great pains to bill the deal as a merger of equals, Boots top executives Richard Baker and Nigel Rudd will get the top jobs in the new Alliance Boots group, and Boots shareholders will get a slight majority of the merged entity.
Stefano Pessina, a 30 per cent shareholder in Alliance UniChem who has given an irrevocable undertaking to support the deal, will be executive deputy chairman of the combined business and take the lead on integration, acquisitions and strategy.
If successful - competition concerns and rival bids could yet stymie the move, which is also dependent on shareholder approval - the agreed nil-premium deal, announced yesterday, will create a company worth about £6 billion on completion next year.
The two firms currently have a combined market value of over £7.5 billion but the deal is conditional upon Boots selling its over-the-counter medicines unit Boots Healthcare International (BHI), a sale that sources close to the situation expect to fetch between £1.4 billion and £1.5 billion.
The deal will add a host of local pharmacies and a powerful distribution network to Boots' British town-centre outlets, which have suffered from the incursion of the big supermarkets into their traditional strongholds.
Alliance UniChem will get the 156-year-old Boots brand for its stores and reduce its reliance on a drug-distribution market which is coming under intense price pressure from governments looking to cut healthcare costs.
Alliance UniChem is already Boots' largest single supplier, while Boots is the distribution group's top customer.
Many industry analysts took a negative view of the deal. "In our view, the deal has to be seen as capitulation by Boots," broker Citigroup said in a research note.
"It seems to us to be an admission that the standalone entity has poor prospects despite the current team's major efforts to reverse damage done by previous flawed strategies."
But shares in both firms rallied, with Boots in particular benefiting from speculation it might attract a counter-offer.
Boots Chief Executive Richard Baker tried to dampen down expectations of an alternative deal. "There is no other current interest, I cannot be more explicit there with you," he told reporters on a conference call.
At 2.40 p.m. British time, Boots shares were up 4.9 per cent at 638-1/2 pence, the biggest rise on the benchmark FTSE-100 index, after earlier touching a high of 657-1/2p. Alliance UniChem was up 2.4 per cent at 887-1/2p, off an earlier peak of 910p.
Boots shareholders will have 50.2 per cent of the group when the deal is completed in 2006, with the final terms of the share exchange to be set just before posting of the merger document.
The combined firm will retain around £400 million from the sale of BHI, while the remaining £1 billion or so will be paid to Boots shareholders.
Mr Baker is to take the helm at the new company, while its chairman, Nigel Rudd, will continue in that role. Alliance UniChem Finance Director George Fairweather will take up that role in Alliance Boots.
The combined firm will have around 2,600 healthcare outlets in the UK, including around 1,400 mostly town-centre shops from Boots and around 1,200 smaller outlets from Alliance UniChem. Its pro-forma operating profit would have been £711 million for the past financial year.
Cost savings stemming from the deal are expected to amount to at least £100 million within four years, mainly from synergies in purchasing and distribution.
Mr Rudd told a news conference the deal would eventually lead to about 1,000 job cuts from a total workforce of around 100,000 - a figure he described as "not significant" in the context.
Mr Baker said he did not believe competition authorities would prevent the deal, since Alliance Unichem's pharmacies were mainly located close to community doctors' surgeries, outside Boots' town-centre heartlands.
"As you'd expect we've looked very closely at the competition issues, we'll be submitting our thoughts to the Competition Commission and listen to what they would have to say," he said.
Stefano Pessina - who said he had been aiming to bring about this deal for five years - said he expected the new group to be highly acquisitive, particularly when markets in countries such as France, Germany and Spain were deregulated.
Alliance UniChem is Europe's second-biggest drugs distributor behind Germany's Celesio AG. Goldman Sachs and UBS are acting for Boots, with Merrill Lynch and Credit Suisse First Boston working for Alliance UniChem.