Sigma taps Goldman Sachs for API takeover bid

It’s the fourth proposal to merge Sigma and API.

Pharmacy wholesaler Sigma has tapped investment bank Goldman Sachs and law firm Minter Ellison for its $773m bid for API, which is working with Macquarie Capital.

Hot on the heels of appointing new South African chief executive Vikesh Ramsunder, Sigma announced it was proposing to offer API shareholders 2.05 Sigma shares for every API share held plus 35c cash per share.

It marks the fourth proposal involving a merger between the two groups over the years and the big test will be whether a tie-up is granted clearance by the Australian Competition and Consumer Commission.

Based on the last closing price of Sigma’s shares of 59.5c on September 24, the offer equates to $1.57 per share.

API is backing the merger proposal despite Wesfarmers sweetening its offer 17c to $1.55 per share on September 16, and has offered Sigma due diligence.

The deal would see API shareholders own 48.8 per cent of the merged entity under the proposal.

Sigma says the transaction could create $45m of annual cost synergies.

The offer also allows for the payment of a fully-franked dividend by API of up to 5c per share, including any final dividend for the financial year ended August 31.

The cash component of the offer would be reduced by the amount of the dividend.

Sigma says it will fund the cash component of the proposal through new debt and expects the merged company will have debt less than 2.5 times its earnings before interest, tax, depreciation and amortisation.

API’s investors on Monday were throwing their support behind Sigma’s $773m cash and scrip proposal.

They were upbeat about the synergies between the two companies, worth about $45m, and the opportunity to use franking credits, estimated to be worth about $50m.

Some believe the synergies are conservative, given that they were estimated to be worth about $70m when API put forward a proposal to merge with Sigma in 2018.

“We welcome the bid by Sigma as a first bid,” said Marc Whittaker, portfolio manager at Investors Mutual, which owns shares in API.

“There are material synergies that API shareholders can share in and we think those synergies are conservative at best.”

Mr Whittaker said that by accepting the Sigma bid, API shareholders do not have to pay capital gains tax and could benefit from the franking credits, worth about $50m.

However, Simon Mawhinney, managing director and chief investment officer of Allan Gray Australia, which is a Sigma investor, said he was not “enamoured” by Sigma’s API proposal.

“Surely the time to do this would not be in the middle of a bidding war?”

“Everything about this seems to be mistimed.”

While the Australian Competition and Consumer Commission has blocked a merger between the pair in the past, this was before industry giant Chemist Warehouse emerged.

Most of Sigma’s revenue is generated from wholesale pharmacy sales compared to about half for API, which owns the Priceline pharmacy franchise.

The proposal comes after API was understood to have reached out to the outgoing Sigma boss Mark Hooper shortly before API announced in July that Wesfarmers had lobbed its first offer for the company, as reported by DataRoom at the time.

Before Wesfarmers’ offer was known, API shares had been trading at about $1.15.

Around June, Mr Hooper was approached by API over its willingness to engage in a tie-up that would unlock millions of dollars’ worth of synergies.

It is understood that pharmacy wholesaler and retailer Sigma, which supplies pharmacy products to brands like Amcal, had taken the view at that time it was currently too focused on installing new IT systems and was not in the position to make the move.

Mr Hooper announced his impending departure from the company last October.

Some had believed that Wesfarmers’ bid could see a change of tack from Sigma to stave off the possibility that a more powerful competitor could be created under Wesfarmers’ ownership.

Three years ago, API made a $727m buyout offer for rival Sigma – a tie-up seen as logical in the industry – but it was rebuffed.

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

It tried to buy API in 2002 and the competition watchdog blocked the deal.

While ACCC issues were earlier thought to be a hindrance, it is believed that when API made its last bid, it had ensured clearance from the Australian Competition and Consumer Commission was possible.

WHSP owns 19.3 per cent of the API stock and had entered into a call option agreement to offload its stake to Wesfarmers at its first offer price of $1.38 per share or more if the deal gained company and shareholder support.

API is in play at a time it has been hit hard by trading conditions linked to the global pandemic.

Sales for API, which owns the Priceline pharmacy chain, are expected to boom in the next financial year as the country recovers from the pandemic and consumers spend big on pharmacy, beauty and healthcare products.

Sigma is an ASX-listed network of independent and franchised pharmacies and healthcare providers across Australia. Its brands include Guardian, Discount Drug Stores, Amcal 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 2018 it had lost a contract with industry giant Chemist Warehouse.

Sigma shares were trading at about 60c in Monday morning trade.