Rebuffed API makes $727m bid for Sigma

The Australian pharmaceutical industry could be set for consolidation after Priceline owner Australian Pharmaceutical Industries revealed it has put forward a $727 million takeover proposal for its rival Sigma Healthcare.

API moved to amass a 12.95 per cent interest in Amcal owner Sigma on Thursday night after it proposed a cash-and-scrip bid worth 68.3c per share on October 11.

Much of the focus now rests on whether the Australian Competition & Consumer Commission will offer approval, given the combined entity would own more than one third of the 5500 pharmacies in Australia. Sigma shares closed below the offer at 58c, indicating that investors are not convinced.

The ACCC offered strong signals this week that it might reject a merger between major telecommunication companies Vodafone Hutchison and TPG Telecom and last month offered the same indication with Bingo Industries’ proposal to buy rival Dial-a-Dump.

The competition watchdog also knocked back a proposal to bring Sigma and API together 16 years ago.

But API chief executive Richard Vincent yesterday said the company had been working closely with the competition watchdog over the transaction, which would probably not gain approval until June.

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“I think the environment and the circumstances with the ACCC are very different than in the past. That is giving me some confidence, but there no guarantees,” Mr Vincent said.

Sigma is an ASX-listed network of independent and franchised pharmacies and healthcare providers across Australia. Its brands include Guardian, Discount Drug Stores and Chemist King, as well as a pharmaceutical wholesaler and distributor.

It has been tipped to be at the centre of a potential deal with one of its rivals since it revealed in July it had lost a contract with industry giant Chemist Warehouse.

Sigma chief executive Mark Hooper said the company would continue to engage with API over the transaction, but needed to ensure the deal created a good outcome for shareholders and examine whether the company would be better off pursuing ­acquisitions on its own.

“We understand the logic behind some form of industry consolidation but a critical element is understanding what the picture is for Sigma doing something without API,” he said. “We are looking at three to four acquisitions at any one time and we feel that there are good opportunities.”

The cost of prescription drugs has fallen since government industry reforms were introduced in 2006, affecting wholesale margins. Funding to offset additional costs has remained static in that time.

The expiry of Sigma’s Chemist Warehouse contract freed up $300m of cash for the business but creates a hole in its earnings.

Speculation has persisted for weeks that a merger between Sigma and the $724m API was on the cards, as reported by The Australian’s DataRoom column in August.

Sigma shares suffered severely, falling 40 per cent, after the loss to rival Ebos Group of its contract to supply 400 Chemist Warehouse and My Chemist stores.

Given Ebos won the contract, it is now considered almost impossible for it to combine with Sigma or API, throwing cold water on suggestions that API bought 12.93 per cent of Sigma shares at 64c each on Thursday through adviser Macquarie Capital due to another suitor circling.

Mr Vincent said the transaction was purely to position the company “on the front foot”.

API is the No 1 provider of beauty products in the mass retail market and generates half of its income from retail pharmacy and half from wholesale.

The ACCC is not expected to rule on the deal until June next year. Some suggest the same ­issues may remain as when Sigma tried to buy API in 2002 and the competition watchdog blocked the deal.

Sigma then offered $566m in 2006 and was rebuffed by the board of API, which counts conglomerate Washington H. Soul Pattinson as a 19 per cent shareholder.

With Chemist Warehouse now such a dominant player, and pharmaceutical distributors CH2 and DHL in the market, the stance of the competition watchdog may have changed, some analysts say.

However, some analysts disagree, saying Chemist Warehouse comprises a collective of individual pharmacists and the that the ACCC could take a view that the same competition issues remain with Sigma, API and Ebos, the three largest participants in the market.

As part of the latest scheme of arrangement proposal, API is ­offering Sigma shareholders 0.31 API shares and 23c cash for each Sigma share, a 69.3 per cent premium to Sigma’s share price at the close of trade on Thursday.

API shares rallied on the news, closing up 12.5c at $1.595.

Sigma closed up 17.5c higher at 58c.

API would own about 63 per cent of the combined entity. Sigma shareholders would own the remainder, and cost savings of $60m would exist in three years.

Fund manager Allan Gray sold 8 per cent of Sigma’s shares to API on Thursday, Managing director Simon Mawhinney said the fund manager was supportive of sector consolidation.