EmailBoots the Chemists has been a classic British household name for years. But the events that have recently gone on behind the shop windows of this much-loved retailer tell a disturbing story about financial engineering, which slashed its taxes.
Boots' debts have soared: and its headquarters are officially no longer in Nottingham, where it was founded, but in the Swiss tax-haven canton of Zug.
In June 2007, the American venture capital giant KKR was able to pull off Europe's largest private equity deal. Together with an Italian entrepreneur, KKR bought the company for £11.1bn by borrowing £9.3bn from the banks and other investors.
It was the first private equity takeover of a FTSE 100 firm. The deal squeaked in with this enormous burden of debt just before the credit crunch brought such lending to a jolting halt.
For the UK exchequer, too, the deal marked something of a record. Private equity's gain in acquiring the high street name turned out to be the taxpayer's loss.
We calculate that Alliance Boots paid out £606m in net finance costs in 2007-08. But its profit in 2008 before interest was only £535m. The interest payments on the debt are so large that they have wiped out any profit in the UK and all the tax that used to go with it.
In the preceding year Alliance Boots plc made profits of around £455m and its accounts for 2007 show £131m tax. Look back to the turn of the millennium and this was typical of Boots' history as a public company - it generally paid about one third of its profits in UK tax and the Revenue could expect to see a tax charge around the £150m mark each year.
However, after its buyout, by the time of its March 2008 accounts it had managed to make a pre-tax loss of £64m.
Current rules allow the firm to set interest payments on its debts against its income for tax purposes, and so the Revenue got nothing. The firm reported a tax credit of £74m in 2008.
Alliance Boots plc had been formed shortly before the private equity takeover, from a £7bn merger between Boots the Chemist, which had about 2,600 stores, and Alliance Unichem, a European pharmaceutical wholesaling operation with the Conservative former chancellor Ken Clarke on the board.
An Italian businessman, Stefano Pessina, now executive chairman of the new private company, was deputy chairman and a 15% shareholder of Alliance Boots when the KKR bid was arranged. The holding company set up to make the acquisition by KKR and Pessina's Alliance Sante Participations is incorporated in the tax haven of Gibraltar.
Both KKR and Pessina's company each collected a £1.8m so-called "monitoring fee" during the year.
Deep job cuts already announced before the bid continued after the buyout. About 900 were laid off in the UK, many in the headquarters in Nottingham. Unions said they feared asset stripping would hollow out what had been a profitable, tax-paying British company for over 150 years.
In June 2008, after more than a century and a half in the UK, the Alliance Boots group moved out of the country to Zug in Switzerland. Pessina, whose interest in the company Alliance Sante Participations is registered in another tax haven of Luxembourg, was quoted at the time as saying that the UK had become a "less friendly business location".
Although Alliance Boots is no longer resident for tax purposes in the UK, a spokesman told the Guardian that the move was not motivated by reducing its tax liability, but rather by the fact that Switzerland was the ideal place to develop the company as an international healthcare organisation.
"We have chosen to locate the overall stewardship of the group in Switzerland as we believe it enhances the position of Alliance Boots as a leading international pharmacy-led health and beauty group alongside a number of the world's leading pharmaceutical manufacturers."
The Liberal Democrat Treasury spokesman, Matthew Oakeshott, fears the full impact of such private equity deals has yet to be felt. "Private equity-owned businesses are a timebomb ticking under Britain's economy and banking system," he said.
"In good times, deals like these pick the pockets of British taxpayers because taxable profits are washed out by loan interest. In bad times like today, they put jobs in jeopardy because they have stripped away the safety net of assets and reserves built up over many years."
The banks who advised on the deal were said to have taken fees of £60m. Barclays provided a large part of the £9.3bn loan and is believed to be still exposed to close to £1bn of the debt.
Other banks wanting to sell on the debt initially got caught by the credit freeze and were unable to do so. Some later sold on some of it at a loss, taking 91p in the £1 for it. The debt has been trading at between 60% and 70% of its face value in recent weeks, according to Thomson Reuters LPC and other sources.
Leading private equity boss Jon Moulton, head of Alchemy Partners, told a conference at London School of Economics last month that it was now "impossible to attribute any real value to the [Alliance Boots] equity".
The private equity owners dispute this view. Last month, Pessina sent a letter to staff reassuring them that the company's cash flow was strong and its long-term funding arrangements were secure.
A spokesman told the Guardian that Alliance Boots did not comment on market speculation, but pointed out that its trading profit for the year to March 2008, which included nine months under private ownership, was up 20.3%.
Even in the difficult trading conditions of the last quarter of 2008, revenue for the group as a whole was up 11%, and in the UK Boots increased its revenue by 3.7%, he added.
As well as Boots stores, the group has big NHS contracts, supplies about 135,000 doctors and hospitals with drugs around Europe and has international wholesaling operations.
The growth of private equity ownership of UK companies has been highly controversial, not only because the technique loads the companies with debt, but also because the fund managers themselves have paid relatively little personal tax. Managers typically take a 20% cut of the proceeds when a company is bought, re-engineered, and sold on.
This personal share of the profits, which can amount to millions of pounds, is taxed as capital gains rather than income. A tax relief introduced in the late 1990s set the effective level of capital gains tax for business at just 10%. The low rate was intended to help entrepreneurs start up new firms, but private equity managers have managed to exploit it.
One critical fund manager blew the whistle himself in 2007. Nicholas Ferguson, chairman of SVG Capital, said "Any commonsense person would say that a highly-paid private equity executive paying less tax than a cleaning lady ... can't be right".
The government subsequently raised the level to 18%, provoking protests from business, even though it is still way below income tax rates.
