Sigma Healthcare (ASX:SIG) shares fell more than 9% at one stage on Thursday after its proposed $8.8 billion merger with the massive Chemist Warehouse encountered potential competition issues with the key regulator, the ACCC.
The shares rebounded after the early drop as supporters of the deal started talking up the stock and downplaying the competition problems, but they still closed the day down more than 4%.
The competition watchdog stated that Sigma Healthcare’s merger with Chemist Warehouse would “substantially lessen competition in pharmacy retailing” and “may lead to increased prices for the goods and services provided in pharmacies.”
In December, Sigma and Chemist Warehouse announced their intention to merge, which would see the latter list on the ASX through a backdoor merger.
Sigma has proposed to buy all the shares in Chemist Warehouse in return for its own stock and $700 million but needs competition clearance, which, based on Thursday’s statement from the ACCC, will be hard to get, even with changes from the deal partners.
“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.”
“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.”
Upon completion of the proposed merger, Chemist Warehouse shareholders will hold 85.75% of the ASX-listed merged group, while Sigma shareholders will hold 14.25%.
Chemist Warehouse is a private company with the Chemist Warehouse, MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse brands.
The company also operates six distribution centers providing products to its franchisees.
Sigma pharmacy brands include Amcal+, Discount Drug Stores, and Guardian.
In the past couple of years, Chemist Warehouse has ended significant supply deals with firstly Sigma and then Symbion (Ebos), totaling $4 billion.
In a statement to the ASX, Sigma tried to downplay the ACCC’s concerns.
"The release today of the Statement of Issues is not unexpected for a proposed transaction of this complexity and is consistent with the ACCC’s stated timeline following an extensive public consultation process,” Sigma said.
"As the ACCC indicates, the Statement of Issues reflects preliminary views on potential issues, which the ACCC will continue to consider.
"Sigma and CWG consider there are good arguments why the proposed merger will not lessen competition and will continue to engage with the ACCC to address its preliminary views and any potential concerns."
Sigma CEO Mr. Vikesh Ramsunder said in the statement that the company is "co-operating closely with the ACCC and look forward to continuing to do so in the next phase of the merger review."
"The proposed transaction will ensure that Sigma, consistent with its regulatory obligations, can continue to serve franchisee and independent pharmacies alike with a competitive offering, whilst delivering a transformational change for all Sigma stakeholders,” he added.
The bottom line is that if there is no deal with the ACCC, there’s no deal at all.
