Sigma shares rocket on Chemist Warehouse merger green light

Sigma Healthcare shares surged as much as 35 per cent after the competition watchdog gave the green light to its $25bn merger with heavyweight Chemist Warehouse.

Green light for Chemist Warehouse merger.

Sigma Healthcare shares surged as much as 35 per cent after the competition watchdog gave the green light to its $25bn merger with privately-owned Chemist Warehouse.

The Australian Competition & Consumer Commission said on Thursday it would not oppose the merger after Sigma’s undertaking about concessions for pharmacy franchisees who may want to exit the brand after the deal.

Under the court-enforceable arrangements, franchisees will be able to switch to a new wholesaler or banner group without onerous exit costs. Sigma will also be required to safeguard and delete the data of those pharmacies that choose to switch. The merged Sigma-Chemist Warehouse will also remain a pharmaceutical wholesaler under the Commonwealth Government’s Community Service Obligation arrangements for five years.

Under the deal, Sigma will acquire all the shares in Chemist Warehouse in exchange for Sigma shares and $700m in cash. Originally billed as a $8.8bn deal, a 250 per cent surge in Sigma’s shares in the past year means it is now valued at $25bn.

The merge will result in Chemist Warehouse shareholders holding 85.75 per cent of the ASX-listed merged entity, while Sigma shareholders would hold 14.25 per cent.

Chemist Warehouse chief executive Mario Verrocchi said the merger was “creating an opportunity” that would benefit both companies’ shareholders and customers.

“Chemist Warehouse has a history of driving innovation and competition, based on a high volume, low prices model,” Mr Verrocchi said. “We believe that the combined group will continue to drive competition within the industry.”

Sigma CEO Vikesh Ramsunder said the decision marks a “critical milestone” with the merger expected to be completed in the first half of 2025 once approval was received from the shareholders of both companies.

Sigma Healthcare managing director Vikesh Ramsunder. Picture: Luis Ascui

Chemist Warehouse, which opened its first store in Melbourne in 2000, now operates more than 500 stores across Australia, employing more than 17,000 people. Sigma has about 400 Amcal and Discount Drug outlets but also is a major wholesale supplier of pharmaceuticals.

Jack and Sam Gance and Mario Verrocchi, the billionaire Chemist Warehouse founders, could emerge with a $15bn share bonanza following the merger.

Sigma shares were up more than 23 per cent at $2.40 on the ASX around lunchtime, after soaring to $2.62 at the start of trading.

Mr Ramsunder, a former boss of South African-based pharmacy chain Clicks Groups, said he would stay on as CEO after the merger.

He said he became an admirer of the Chemist Warehouse business model, particularly its strengths in retailing, when he took on the Sigma role in 2022.

“When I came to Australia three years ago and started building my own brands, Chemist Warehouse was the one I wanted to beat,” he said. “They remain a very effective competitor.” He said the merger combined Chemist Warehouse’s retailing prowess with the supply chain and wholesaling strengths of Sigma. He conceded Sigma’s retail brands probably had not performed as well as Chemist Warehouse, which has a strategy of stocking a wide range of products combined with aggressive marketing strategies.

Mr Ramsunder dismissed concerns from the Pharmacy Guild that the merged company would control more than half the revenue in the sector.

“I was never concerned about this because we don’t own the stores, and we don’t control the franchisees,” he said. “They are free to do what they want, including leave without penalty.”

He said the undertakings to franchisees would give them certainty while the merger was completed. “It will allow them to look at our behaviour post merger, and I’m confident they will want to stay on.” He said the merger came amid continuing margin pressure in the sector. “The government is putting pressure to reduce the cost of medicines, so we need to have scale.”. 

Additional reporting: John Stensholt