Woolworths-Wesfarmers battle for API could put Chemist Warehouse in play

Chemist Warehouse controls more than 300 pharmacies, is thought to generate about $250m of annual earnings. Picture: NCA NewsWire/Sarah Marshall

The battle between Woolworths and Wesfarmers for Priceline owner Australian Pharmaceutical Industries could ultimately result in Chemist Warehouse being back in play.

The $5bn dominant pharmacy business has been in Wesfarmers’ sights before.

Chemist Warehouse is preparing for an initial public offering in the future, and no doubt adviser Rothschild is putting thoughts to how the battle between two retail giants for API could play in Chemist Warehouse’s favour.

Both supermarket chain Woolworths and Target, Kmart and Officeworks owner Wesfarmers have fire power and are unlikely to give up on API without a fight, as they both look at ways to lift customer numbers and the amount they spend.

There is only one winner, but the unsuccessful group is unlikely to walk away without a plan B.

No doubt, the prize is pharmacy wholesaler and retailer API, given that it involves suitors only paying $872m to get a foothold into the pharmacy industry, rather than Chemist Warehouse’s commanding price of about $5bn.

Chemist Warehouse is considered a superior business, but probably worth more than 15 times net profit on offer that API, which has a franchise model for Priceline, is being valued at.

Chemist Warehouse is owned by My Chemist Retail Group and was founded by the Gance and Verrocchi families.

It controls more than 300 pharmacies, is thought to generate about $250m of annual earnings through a low price model and has a complex ownership model enabling the business to work around the restrictive ownership rules.

API’s buyer will get the parent of the Priceline pharmacy, Soul Pattinson Chemist and Pharmacist Advice brands, a range of retail services to its community pharmacy partners and company-owned Priceline retail stores.

It also gains its skin clinics business Clear Skincare and its health and personal care business, Consumer Brands.

Woolworths on Thursday announced an informal proposal to buy API for $1.75 a share, or $872m, through a scheme of arrangement.

This was after Wesfarmers lifted its bid to $763m, or $1.55 a share, on November 8 following an earlier offer of $1.38 a share that was rejected.

Woolworths is understood to have been a keen buyer of API, advised by Macquarie Capital, for some time, but has been distracted by the global pandemic and has not had the opportunity to engage.

Perhaps Wesfarmers would have had a deal sown up if it had initially put its strongest bid on the table.

Jarden’s head of investment banking, Aidan Allen, advising Woolworths, is known to have a close working relationship with chairman Gordon Cairns, while Morgan Stanley is also advising the supermarket giant.

Gresham-advised Wesfarmers, which already owns 19.3 per cent of the business, has the right to match the Woolworths offer should it put forward a binding proposal after carrying out its four weeks of due diligence on the target.

The Perth-based conglomerate purchased the stake from Washington H. Soul Pattinson, in a call option deal where Wesfarmers would need to pay an additional amount for the holding equivalent to any higher price that the company is sold for.

Woolworths has apparently had an interest to get into the pharmacy industry before under the watch of Roger Corbett, but he never gained the support of the Pharmacy Guild.

While Sigma could also be a target, the thinking is that Chemist Warehouse is likely to be a more attractive acquisition alternative, given that Sigma is a pharmacy wholesaler rather than a retailer.

Sigma earlier launched an offer for the group, but the thinking is that it has probably missed its chance, although it may be able to cut itself into a deal on the side of Wesfarmers or Woolworths.

Woolworths said it was also willing to launch an offer via a takeover with a minimum 50.1 per cent acceptance threshold. Should that be the case, things could get even more interesting.