Fairfax (FFH) and Wittington Investments will acquire the Boots UK and Ireland retail operations and certain other businesses for US$8.9B. While Fairfax will hold a 50% equity stake, operational control will stay with Wittington, the holding company of the Weston family - which makes sense given the value the family has created in Loblaw (L).
Boots is a major retailer in the UK, with approximately 13% market share in pharmacy and 30% in beauty…
… which has been the dominant driver of retail revenue outperformance in recent years…
… and could drive gross margin expansion as Boots intensifies its investments in the category.
With the Weston family at the helm, Boots could look to replicate Shoppers Drug Mart’s beauty retail strategy (dominant in ultra-premium and high-end luxury cosmetics)…
… beauty for an investor is an amazing category. It's a big category. It would usually outgrow GDP. It's not particularly cyclical. So there would be a little bit of trading down in bad times and a lot of trading up in good times.
… which has been extremely profitable here in Canada.
While beauty is the growth strategy, Boots’ pharmacy operations should be a steady compounder if Loblaw is any indication…
… supported by continued growth in prescription prices and an aging population, which drives relatively inelastic demand for medication.
Together, these two businesses have aided earnings consistency at Loblaw, resulting in significant multiple expansion…
… and we believe similar value creation is possible at Boots, though it will be embedded within Fairfax’s broader portfolio of companies.
