Australian Pharmaceutical Industries (API) has made a fresh push for a merger with the struggling Sigma Healthcare (SIP), revealing it had made a $700 million offer to Sigma’s board in October.
On Friday, API also announced it had acquired a 13% stake in the rival pharmaceutical wholesaler, and reconfirmed the terms of the non-binding indicative offer made in October, which offers Sigma investors 0.31 API shares and 23 cents cash for each Sigma share they own.
API said the value of the proposal equates to 68.6 cents a Sigma share, which represents a 69% premium to the target’s closing share price on Thursday of 40.5 cents.
API is 19.3% controlled by Washington H Soul Pattinson. On paper, a bid for Sigma would see that stake watered down. But API and its Soul Patts and Priceline Pharmacy chains and Sigma’s four pharmacy chains led by Amcal – will have a significant share of the market.
For that reason, the competition regulator might end up determining if this bid goes ahead.
The Australian Competition and Consumer Commission (ACCC) blocked a merger of API and Sigma back in 2002 saying there was “insufficient public benefit to outweigh the harm to competition”.
Since then the growth of Chemist Warehouse has changed the structure of the industry and has proved to have been more destabilising than any other development.
But you only have to look at the concerns the Commission expressed about the TPG Vodafone merger to wonder if Sigma and API will be allowed to post the banns, let alone marry.
Investors are cautious because of what could be major competition concerns ahead for any deal. That’s why the Sigma share price leapt 48% to 60 cents in trading on Friday – that’s well short of the 68 cents implied by the API offer.
Sigma’s share price has not recovered from an announcement in July this year that it had been dumped as the preferred wholesaler for Chemist Warehouse.
NZ-based Ebos won the Chemists Warehouse deal through its Symbion operation in Australia.
API chairman Mark Smith said his board believes a merger is the best opportunity to deliver significant benefits to both companies’ shareholders. API has claimed a merger could deliver $60 million in gross savings by year three after the deal.
“The real benefits of the proposed merger come from infrastructure and back office cost savings,” Mr. Smith said on Friday.
“The intention is therefore to maintain both API and Sigma’s retail brands.”
Much of API’s stake came from one of Sigma’s largest shareholders, Allan Gray, which signalled its support for the proposed merger.
“We have previously stated that we are supportive of consolidation in the pharmaceutical wholesaling sector and are positively disposed to efforts to expedite its consolidation,” said Allan Gray’s chief investment officer Simon Mawhinney.
API acquired 8% of Sigma from Allan Gray.
