Birth of a $9 billion pharmacy group is just what the doctor ordered

The union of Sigma and Chemist Warehouse is about to give birth to a $9 billion retail baby. It doesn’t have a name yet, but it will be to retail pharmacies what Bunnings is to hardware, what JB Hi-Fi is to electronics, or Endeavour to booze.

There has been a dearth of new listings over the past couple of years, thanks in large part to the interest-rate-affected wobbly equity markets scaring off would-be entrants.

This deal will be a much-needed shot in the arm.

A mega pharmacy mega deal.

The deal isn’t strictly an initial public offering – it is a back-door listing of Chemist Warehouse.

After decades of private ownership, the two billionaires who built the Chemist Warehouse empire, Jack Gance and Mario Verrocchi, are getting together with the smaller but publicly listed Sigma – transforming the combined listed entity into one that will be large enough to excite the interest of institutional shareholders.

It has a bunch of hurdles to jump and won’t be without its detractors, but for investors it will be something of a white whale.

With combined earnings before interest and tax of almost half a billion dollars in the 2023 financial year, and the promise of $60 million in annual synergies to come, this full-service wholesaler, distributor and pharmacy retailer will also have high-recognition retail brands to attract mum and dad investors.

There is lots to like about this deal – most particularly that the marriage of these two companies is symbiotic – they both bring complementary assets to the union.

The Chemist Warehouse founders will become the largest shareholders in the new company and remain on its board. The chairman and chief executive of Sigma will take the formal positions of running the merged group.

There is lots to like about this deal – most particularly that the marriage of these two companies is symbiotic – they both bring complementary assets to the union.

But it is Chemist Warehouse that brings the heft, and a decades-long history of growing a large and successful business from scratch.

Chemist Warehouse founder Jack Gance.Credit: Flavio Bracaleone

There are a couple of things, however, to be wary about as well. Most particularly, the escrow provisions that prevent the founders from selling their combined stake of almost 50 per cent will be fully lifted by 2026.

This could be viewed as positive in that there will be more shares available to outside shareholders over time.

The negative take on this is that the architects of the highly successful Chemist Warehouse could cash in their chips in three years.

This potential was played down yesterday as the founder families stressed they were fully committed to the business.

But the reality is that this is a liquidity event for Gance and Verrocchi – whether it be sooner or later.

There is a lot to be said for owners running their own businesses. They spend their own money rather than other people’s money, and do so by taking some risks, but keeping a forensic eye on costs – and all outside the glare of the public markets.

Sigma’s Amcal pharmacies will be combined with those of Chemist Warehouse.Credit: Glenn Hunt

Of course, the upside to being in the public markets is access to capital and the merged group has big plans. They have spoken of the potential to increase the number of franchised pharmacies by 400 in Australia alone.

There is also the opportunity to further expand internationally, the potential for which they have described as “infinity and beyond”.

Already Chemist Warehouse has a presence in New Zealand, China and Ireland, but it has a thirst for further growth.

The merger has to gain the seal of approval from the Australian Competition and Consumer Commission, which was another aspect that was played down amid the enthusiasm of announcing this merger.

And it goes without saying that the influential Pharmacy Guild of Australia is raising red flags. It “believes the apparent imminent takeover of Sigma Healthcare by Chemist Warehouse poses significant questions and risks”.

The corporatisation of pharmacies, even under the franchise model, is an evolution that does not accord with the old guard of pharmacist-owned businesses.

That said, the horse has already bolted and a number of big players are already in the franchise market.

Combining Sigma’s Amcal pharmacy set with those of Chemist Warehouse may not alter that direction.

But that is a matter for the ACCC.

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