Wesfarmers’ surprise offer to buy Priceline owner knocked back as low-ball, ‘opportunistic’ after Covid dented profits

The Kmart, Target and Officeworks owner needs to up its offer if its plan to get into pharmacies and beauty retailing through Priceline is to succeed.

Priceline has knocked back a takeover offer from Bunnings’ owner Wesfarmers, saying the bid is “not compelling” and opportunistic given the impact lockdowns have had on its shops.

The conglomerate, which also owns Kmart, Target and Officeworks, launched the proposal to acquire Priceline owner Australian Pharmaceutical Industries on July 12 - the same morning API announced a full-year earnings downgrade due to Covid-related trading restrictions.

On Thursday, API said it had carefully considered the $1.38 cash per share bid and came to the conclusion the total consideration of almost $687m undervalued the business and was not in the best interests of shareholders.

API said it had determined its own value by assessing medium- and long-term growth prospects in the booming health, wellness and beauty sector, and reviewing a range of scenarios in relation to its recovery from the Covid-related trading restrictions.

Priceline has taken a big financial hit from lockdowns. Picture: David Geraghty / NCA NewsWire

It labelled Wesfarmers’ move opportunistic in timing, given the pandemic had dented its financial performance over the past 18 months, particularly its retail-facing businesses.

API suffered a 30 per cent profit plunge in the half-year to February 28.

Among reasons for its bullish sentiments about medium-term growth prospects, API cited capitalising on “the recent growth in eScript take-up combined with the Priceline app and store network to deliver essential medicines direct to home”.

“Although API’s share price has recently traded above the price offered in the indicative proposal, the board recognises that the share price may trade below this level in the short term,” the takeover target told its investors.

“Nevertheless, the board will only progress a change of control transaction on terms that recognise the fundamental value of API and are in the best interests of API shareholders as a whole.”

The closest Wesfarmers has come to health care so far has been offering up its Bunnings car parks for Covid jabs. Picture Katrina Bridgeford

API’s shares have traded above the offer price - at $1.40 or higher - for the past fortnight, suggesting investors also believe the offer is low-ball.

Soon after it was lobbed, Morgan Stanley gave API a potential valuation scenario of $1.45 to $1.75 per share, noting the company operated in “a competitive and regulated industry, reflected in relatively flat earnings in the years preceding Covid-19”.

But the offer immediately won the backing of API’s biggest shareholder, Washington H. Soul Pattinson – best known for its pharmacies – giving Wesfarmers an 19.3 per cent stake.

Wesfarmers seeks to branch into pharmacies and beauty stores for the first time, arguing it has the heavyweight retail and distribution strength, sizeable finances and willingness to invest to capitalise on API’s strengths and market position.

“We note and are considering the API announcement. We continue to believe the Wesfarmers offer is compelling for API shareholders,” a spokeswoman said.