Sigma Healthcare shareholders rubber stamp $34bn merger with Chemist Warehouse

There’s no reason Chemist Warehouse’s strong growth won’t continue, the Sigma Healthcare chair says, as the $34bn merger of the two companies passes a crucial vote.

Sigma Healthcare managing director Vikesh Ramsunder. Picture: Luis Ascui

There’s no reason Chemist Warehouse can’t continue the rampaging growth which the retail pharmacy chain posted in the first half, Sigma Healthcare chairman Michael Sammells said, as shareholders in his company waved through the $34bn-plus merger of the two entities.

The merger of the two companies - effectively a reverse takeover with Chemist Warehouse shareholders to emerge with about 85.7 per cent of the merged entity once it relists for trade on the ASX on February 13 - will create a vertically-integrated pharmacy wholesaler and retailer with more than 1000 stores across Australia and internationally.

Sigma shareholders, at a meeting held on Wednesday afternoon, voted overwhelmingly to support the deal, which has already delivered them a circa-fourfold share price boost, from 76.5c when the deal was announced in December 2023, to $3.03 when the stock was suspended from trade on Wednesday morning.

Chemist Warehouse shareholders were expected to vote in favour of the merger at meeting held late on Wednesday, with founders Jack and Sam Gance and Mario Verrocchi to be launched into the ranks of Australia’s billionaire elite as a result.

The trio will emerge from Wednesday’s meetings holding shares worth more than $15bn, or around 48 per cent of the newly formed company, with all of their shares escrowed until August this year, and 90 per cent until August 2026.

Jack Gance is the co-founder and chairman of Chemist Warehouse. Aaron Francis/The Australian

Chemist Warehouse’s minority shareholders, some of whom own parcels of shares worth hundreds of millions of dollars, do not come under the escrow provisions, setting the scene for an interesting first few days of trade as fund managers seek to establish their positions in the stock, and existing shareholders potentially look to cash out.

Mr Sammells told The Australian after Wednesday’s meeting that given the newly-formed Sigma Healthcare board, including Mr Verrocchi and Damien and Jack Gance, had as-yet been unable to meet for legal reasons, the first order of business would be to move on the estimated $60m in synergies between the two businesses and other integration plans.

“There’s a lot of integration work, these are two entirely different organisations, we have some duplicate infrastructure in terms of warehouses, corporate staff, locations, so there’s a large synergy opportunity which we’ve flagged to the market, but there’s a lot of detailed work required to deliver on that promise which we will do,’’ he said.

Mr Sammells said the opportunity to get together in the same room and look at future plans from a strategic point of view would also be a priority.

“We’ve been prevented from having those style of discussions which is quite unusual ... but we’ve been enormously respectful of the laws of the land,’’ he said.

Mr Sammells said Chemist Warehouse was confident it could maintain the sort of strong growth figures it reported earlier this week, “and I have no reason to believe otherwise’’.

Chemist Warehouse said on Tuesday, in a statement lodged with the ASX by Sigma, that its total retail network sales for the first half came in at $5.15bn, up 13 per cent, while on a like for like basis, excluding new store openings, sales growth was 10.3 per cent.

The company opened 36 new stores during the half, and now has 658 in total, with the vast majority in Australia.

Chemist Warehouse’s earnings before interest and tax came in at $437.9m for the half, up 35 per cent, while the company’s earnings margin expanded from 18.3 per cent to 22.3 per cent.

Sigma managing director Vikesh Ramsunder told the meeting he had no trepidation about working with Mr Verrochi, who would be on the board, remain a major equity holder with 22 per cent of the company, and be reporting to him as head of the Chemist Warehouse division.

“Actually I’m looking forward to it,’’ he said.

“If I consider Mario’s expertise and experience and what he’s created in the country, and combining that with my experience having run a listed entity I think the combination could be very good for the future of the organisation, so I have no reservations around it.’’

Activist shareholder Stephen Mayne suggested the company immediately launch a capital management initiative such as a share placement or buyback to allow the overhang of Chemist Warehouse shares to be mopped up and avoid “chaotic” selling of shares.

Mr Sammells told the meeting that given the board had not yet met, such a strategy had not been considered.

Mr Sammells said after the meeting that the level of investor interest had been “quite material”, which had been stymied by a lack of stock.

The first days and weeks of trade are expected to be vigorous, with index funds alone likely to be in the market for more than half a billion dollars worth of stock, according to analysis by Ord Minnett.

Vikesh Ramsunder, managing director of Sigma Healthcare and Chemist Warehouse co-founder Mario Verrocchi.

Ord Minnett said in a note to clients that the integrated business model promised more growth, however the share price would be influenced by non-fundamental factors in the short-term.

“MergeCo is set to establish itself as the number one vertically integrated pharmacy group in Australia, with a capital light business model offering material growth optionality both domestically and internationally,’’ Ord Minnett said.

“We remain positive on the outlook for growth and margins but expect near-term price action to be dominated by passive/index buying and non-escrowed Chemist Warehouse Group shareholder selling.’’

Ords has a $2.15 target price on the stock and an accumulate recommendation, however both are under review.

Barrenjoey analysts said Chemist Warehouse’s before tax profit result reported this week and its store growth numbers both beat their expectations.

Citi analysts said the update was “very positive”, with a big step up in margins put down to new supply arrangements including agreements with Sigma.

“While we do not yet incorporate Chemist Warehouse into our Sigma forecasts, the result suggests that the combined group is tracking well ahead of our expectations for about $800m of combined pro-forma earnings before interest and tax in the first full year post merger,’’ Citi analyst said.

Originally published as Sigma Healthcare shareholders rubber stamp $34bn merger with Chemist Warehouse