The competition regulator, the ACCC, has raised questions about the planned $8.8 billion backward merger between Sigma Healthcare (ASX:SIG) and Chemists Warehouse, citing ‘competition concerns’.
In a statement issued Thursday morning, the Commission said it was outlining “preliminary competition concerns” with Sigma’s proposed acquisition of Chemist Warehouse Group Holdings in a Statement of Issues.
“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that, in turn, compete against Chemist Warehouse,” ACCC Commissioner Stephen Ridgeway said in the statement.
“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level. We want to hear from interested parties, including rival pharmacies, as we continue this review,” Ridgeway said in the statement.
The ACCC said Sigma is one of the largest wholesalers of prescription medicines, over-the-counter, and front-of-store products. Sigma also provides brand and support services to community pharmacies operating as franchisees under Sigma banners such as ‘Amcal+’, ‘Discount Drug Stores’, ‘PharmaSave’, and ‘Guardian’.
The Commission also pointed out that Chemist Warehouse is a franchisor of pharmacies and retail stores under the brands Chemist Warehouse, MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse. It is also a wholesaler and distributor and provides brand and support services to its franchisee pharmacies.
“The transaction would create a merged company that is uniquely vertically integrated across multiple levels of the pharmacy supply chain. This new business model for the pharmacy sector could raise barriers to rivals expanding or entering, which may lessen competition,” Mr. Ridgeway said.
“The ACCC has heard many concerns about the impact Chemist Warehouse has had on the pharmacy sector. However, the ACCC is focused only on the impacts of the acquisition on competition, rather than the pros or cons of different business models. The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products.”
The ACCC is also concerned that the proposed acquisition may harm pharmacies currently supplied by Sigma, leading to a substantial lessening of competition in pharmacy retailing.
Currently, Sigma is incentivized to maximize wholesale sales, but after the transaction, the independent pharmacies it supplies will also be competitors to Chemist Warehouse.
“In particular, we are focused on how the newly merged company may have the ability and incentive to favor Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive,” Mr. Ridgeway said.
“Currently, independent pharmacies have three main choices for wholesale supply and banner franchise arrangements, but given the potential data concerns and risk of competitive harm, the effective options for some pharmacies may reduce to two.”
In addition, the ACCC is concerned the proposed acquisition may substantially lessen competition in pharmacy retailing because it could reduce the competition Chemist Warehouse and Sigma’s banner stores impose on each other.
“This lessening of competition may lead to reduced service quality for goods and services provided in pharmacies as well as higher prices for consumers. The transaction may also weaken the competitiveness of the different product and services offered by Sigma’s banner pharmacies,” Mr. Ridgeway said.
From this, we can infer that the ACCC has very serious concerns about the proposed deal. Normally, these can be met by asset sales — in this case, chemists or other businesses — but in parts of the country, the merged company will dominate the pharmacy trade.
According to the Australian Financial Review, a Singapore hedge fund research group called Wickhams Hill stated that the merged company will dominate pharmacies, owning 16% of the outlets but 68% of Melbourne’s market (excluding small single traders) and be the major pharmaceutical group in Darwin.
But, as the ACCC pointed out, there’s the distribution and drug availability side of the deal.
The other major distributors in Australia are Symbion, which is controlled by Ebos of New Zealand (which is also a major pet food and products supplier as well), and Wesfarmers, which bought API a couple of years ago.
Both would have to be convinced to buy parts of the merged company if it wants to get the deal done.
The merged Chemists Warehouse and Sigma would control 864 outlets trading under the Chemist Warehouse, MyChemist, Amcal, and Discount Drug Stores banners. Many of these are franchises, especially for Chemists Warehouse, and any deal would have difficulty because of their presence and the fact they can’t switch to another banner.
