Chemist Warehouse-Sigma merger to face scrutiny

Chemist Warehouse will soon be a listed business that is part of Sigma. Picture: Gaye Gerard, NCA NewsWire.

Chemist Warehouse’s back door listing into Sigma will have regulators crawling all over it because it will create a vertically integrated business model that will make it virtually impossible for its rivals to be competitive on price in an as profitable way.

The Pharmacy Guild of Australia that backs pharmacists has been strongly opposed to supermarkets selling drugs and issuing prescriptions as they look to protect the industry, but if the Australian Competition and Consumer Commission really wants to break the power of the Sigma and Chemist Warehouse combo, it’s one way this could happen.

The latest deal is a serious blow to the business models of Wesfarmers, which owns the pharmacy wholesaler and retailer API, and Australia and New Zealand’s largest wholesaler EBOS, which has been left scrambling to fill an earnings hole after Chemist Warehouse withdrew its business and gave it to Sigma.

Wesfarmers has weight an acquisition of Chemist Warehouse in the past.

One way Sigma and Chemist Warehouse could get it past the ACCC is arguing that a tie-up would lower prices.

But if it knocks out competitors in the process, would this still be the case in the long run after it has put its rivals out of business?

The pharmacy guild’s key focus is to protect small independent pharmacy operators that have already been severely impacted by the rise of Chemist Warehouse, causing some in cases to shut its doors.

As soon as David Di Pilla bought shares in Sigma last year, the writing was on the wall surrounding a Chemist Warehouse deal, because his relationship with the latter is close.

It was only a few years ago when Wesfarmers and Woolworths were battling for the Australian listed API that Sigma looked in serious strife because it had earlier had the Chemist Warehouse contract taken from it by EBOS and had been left out of the consolidation race.

Now it appears that it has experienced a considerable change in fortunes.

This week’s $350m raise by Sigma in preparation for the big deal provides a small pay day for Goldman Sachs but the real fees for the banks involved will come down the pipeline when the $3bn Chemist Warehouse back door listing comes into force.

It’s likely to require lots of creative work by bankers and perhaps large parcels of equity changing hands.

Macquarie has been hanging around the Chemist Warehouse hoop for years so if it is not in the middle of the action it would be a major upset, while David Di Pilla goes a long way back with the key figures at Barrenjoey when he worked with them as a banker at UBS.

And then there’s Robbie Vanderzeil behind the scenes in Di Pilla’s camp, a former top equities operative at UBS and Jarden.

Chemist Warehouse is advised by Rothschild & Co, appointed when it was considering a float some time back.

The $350m being raised by Sigma is to provide working capital, while some say that the money may be needed to provide enough free float, should Chemist Warehouse take scrip in the business that may equal about 90 per cent.

There needs to be at least a 20 per cent free float under the ASX listing rules and 30 per cent for S&P index inclusion.

Mr Di Pilla is the managing director of HMC Capital, formerly known as Home Consortium, and he amassed a stake of more than 19 per cent in Sigma more than a year ago.

He formed the company after buying the sites of the former Masters home improvement chain that were owned by Woolworths.

At that time, the sites were purchased for more than a collective $700m with a consortium that included his former UBS Australia boss Matthew Grounds, (now the Barrenjoey group boss) Spotlight Group and Chemist Warehouse.

Sigma is an ASX-listed pharmaceutical wholesaler and distributor and also has a network of independent and franchised pharmacies and healthcare providers across Australia.

Its brands include Amcal, Guardian, Discount Drug Stores and PharmaSave.

DataRoom reported in March that a tie-up between Sigma and Chemist Warehouse was one scenario that has been discussed.

The Australian reported in June that Sigma Healthcare had reached a $2bn pharmaceutical drugs deal with Chemist Warehouse.

The deal provided a 10.7 per cent stake in Sigma to Chemist Warehouse that bound the wholesaler and retailer.

The Australian reported in October that Chemist Warehouse, which is controlled by founders Jack Gance and Mario Verrocchi, made a net profit of $302m for the year to June, down 22 per cent from the $385m it made a year earlier.