Wesfarmers move on API has market guessing what is next in store for Washington H. Soul Pattinson

One of API’s Priceline pharmacies. Picture: Christian Gilles

Wesfarmers’ move on Australian Pharmaceutical Industries is not regarded as very surprising after it considered various healthcare targets in the past, including API’s larger rival Chemist Warehouse.

But what was interesting to some market participants on Monday was the willingness by Washington H. Soul Pattinson to sell into the offer at the current price should it succeed.

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.

Wesfarmers announced on Monday its attempt to buy Chemist Warehouse’s smaller rival for $687m, a 21 per cent premium to the closing price on Friday.

On Monday, shares were up 19 per cent to around $1.36.

Sales for Priceline pharmacy chain owner API are in the next financial year expected to boom 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, 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.

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 launch 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 listed last year by Quadrant Private Equity and currently has a market value of more than $400m.

And they will use their 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.

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 it 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.

The latest proposal comes three years after API made a $727 million 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, so it will be interesting to see if it or other rival Ebos emerges around the hoop now that the company is in play.