Sigma Healthcare has come over the top of Wesfarmers and launched a bidding war for rival chemist Australian Pharmaceutical Industries – for how long we don’t know given that rival bidder Wesfarmers has more money and regulator, ACCC has already knocked back a similar deal 20 years ago.
The news saw API shares rise more than 3% to $1.51 – just more than the $1.50 a share cash offer from Wesfarmers but less than the cash and paper non-binding offer from Sigma.
Sigma will offer to acquire 100% of API in exchange for 35 cents in cash and 2.05 Sigma shares for each API share owned.
This gives the deal a value of $1.57 a share, just ahead of Wesfarmers’ $1.55 a share offer that was updated earlier this month.
The Sigma bid though saw an interesting reaction – its shares rose rather than fell, ending the day up 1.7% at 60.5 cents.
These days a bidding company’s shares usually takes an initial hit from those negative about the deal especially when the bidder plans to dilute existing shareholders with a share-based offer.
But not so Sigma, as investors claimed to see positives in the offer – even if the key regulator, the ACCC is lurking.
The news pushes the onus back on Wesfarmers to deliver a knockout blow with a sharply higher cash offer price. It has the cash to do so.
Talk of a merger between the two companies has been a bit of a tale around the market for several years but on Monday, at the start of the final week of the quarter, it became a reality.
The parties involved do have some history in takeovers and mergers activity, with API making its own offer to acquire Sigma back in 20029 in a similar cash and scrip deal.
Competition regulator ACCC knocked that deal on the head – at this stage there is no reason to think the commission has changed its mind.
The two tried again in 2019 but Sigma rejected the API approach which then sold its shares.
The API board has recommended shareholders vote in favour of Sigma’s bid over Wesfarmers, saying the deal would be “more favourable”, though it would take longer to implement.
Around $45 million in synergies have been identified by Sigma if the deal were to go ahead.
“The board notes that there is no certainty that the engagement between API and Sigma will result in a change of control transaction or an offer capable of acceptance by API shareholders,” API said.
Sigma has been granted due diligence in order to facilitate a binding offer, which will run in parallel with the due diligence already granted to Wesfarmers.
Complicating matters this time is the option Washington H Soul Pattison has given to Wesfarmers over its 19% stake in API.
API owns the Priceline retail chain of pharmacies (as well as Soul Patts) and has a chain of skincare clinics. Sigma distributes drugs and other products and has several chains of pharmacies in its portfolio lead by Guardian and Amcal.
The rise of the aggressive Chemist Warehouse chain and growth of rivals such as Terry White and a string of online pharmacies might see the ACCC take a different attitude.
The Pharmacy Guild’s ownership and location rules, though, might be a hurdle in the way they tend to restrict the ability of chain owners to rationalise.
