Australian Pharmaceutical Industries and rival Sigma Healthcare are understood to have revived merger talks in recent weeks, in what may suggest that Wesfarmers could face a fight to win over its $687m takeover target.
Wesfarmers announced a $687m bid for API that equates to $1.38 per share, a 21 per cent premium to the closing share price on Friday.
API’s shares closed at $1.37 on Monday.
But DataRoom understands that just weeks ago, outgoing Sigma boss Mark Hooper was approached by API over its willingness to engage about a tie-up that would unlock millions of dollars’ worth of synergies.
It is understood that pharmacy wholesaler and retailer Sigma, which operates under brands like Amcal, had taken the view it was currently too focused on installing new IT systems and was not in the position to make the move.
Mr Hooper has also announced his departure from the company from October and a new chief executive is yet to be appointed.
However, some believe that Wesfarmers’ bid could see a change of tact from Sigma to stave off the possibility that a more powerful competitor could be created under Wesfarmers’ ownership.
The latest proposal comes three years after API made a $727m buyout offer for its rival Sigma Healthcare – a tie up seen as logical in the industry – but it was rebuffed. Years earlier, Sigma tried to buy API.
While competition watchdog 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 has entered into a call option agreement to offload its stake at the offer price of $1.38 per share or more if the deal gains company and shareholder support elsewhere.
The move effectively puts the company in play at a time it has been hit hard by trading conditions linked to the global pandemic.
Sales for Priceline pharmacy chain owner API 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.
Some believe it suggests that the Robert Millner-chaired Soul Patts appears to be moving further down the global equities route, with its recent $4bn scrip offer for listed investment group Milton, agriculture and into aged care after making attempts last year to buy aged care operator Regis.
There is also a view that the listed investment company BKI could be next on the acquisition list for Soul Patts, given it remains a shareholder.
Meanwhile, Wesfarmers is understood to have closely scrutinised Chemist Warehouse for an acquisition about three years ago, as revealed by DataRoom last year.
However, the Perth-based listed conglomerate passed on the opportunity, instead holding the view that it was better off focusing on its own operations.
Chemist Warehouse is now slated for an initial public offering in 2022.
Rothschild is advising Chemist Warehouse and investment banks are expected to be sought around the end of this year.
Wesfarmers has had an interest in healthcare operations for some time, attracted to the anticipated industry earnings growth due an ageing population.
Recently, it has considered looking at the country’s largest cancer care provider Icon Group, which is up for sale through Goldman Sachs and Jefferies, although some believe it may now not pursue the target in what is expected to be a highly competitive sales process.
It carefully sized up the country’s second largest hospital operator Healthscope for a potential take-private transaction.
In this respect, it means that its move to target a pharmacy business for an acquisition does not come as a major surprise in a deal set to seed a new healthcare division at the group.
Whether it moves forward on its offer will no doubt be dependent on the view Wesfarmers takes of the business after carrying out due diligence, although API is yet to offer a recommendation.
Some market analysts take a view that Wesfarmers will take on the online listed cosmetics retailer Adore Beauty with the acquisition, which was listed last year by Quadrant Private Equity and currently has a market value of more than $400m.
And it will use its expertise from online retail business Catch and experience with companies in the area of distribution.
API already has a strong online retail pharmacy business – it is the No 1 provider of beauty products in the mass retail market – and generates about half of its income from retail pharmacy and half from wholesale.
Working for Wesfarmers is Gresham, which it partially owns, while API has Macquarie Capital providing defence.
Wesfarmers boss Rob Scott said on Monday that the plan was to improve the business and enhance the online operation and it would form the start of a new healthcare division.
For the six months to February, API’s overall profit fell 29.3 per cent to $15.9m.
Wesfarmers is cashed up, having sold $2bn worth of shares in the Coles Group supermarkets business in February and March.
When it was known last year that Wesfarmers had been looking at Chemist Warehouse, analysts at the time said that the business remained a good fit within its retail division, which includes Bunnings, Target, Kmart and Officeworks.
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