How Mario Verrocchi, Jack and Sam Gance built giant Chemist Warehouse, as blockbuster $8bn Sigma deal confirmed
It all started with a chance meeting, and a job offer. The Chemist Warehouse founders and their families will emerge about $5bn richer as a result of the blockbuster merger.
The genesis of the $8.8bn mega-merger between Chemist Warehouse and Sigma Healthcare traces back to a single pharmacy in a gritty Melbourne northern suburb, where a now billionaire finally found a trainee job with two fellow retail magnates after 100 rejections.
It was in Reservoir that Mario Verrocchi met the Gance brothers, Jack and Sam, in 1980 just after graduating with a pharmacy degree from the University of South Australia.
The Gances bought their first Reservoir chemist in 1972, and another one 300m away three years later in what was an area full of Italian migrants.
Being able to converse in Italian got Verrocchi his job and started what he calls a “beautiful relationship” that has led to he, Jack and Sam Gance all becoming billionaires in their own right after confirmation on Monday of their behemoth Chemist Warehouse executing a reverse takeover of ASX-listed Sigma in an $8.8bn deal.
“I remember with my cousin, who just got his licence, we drove around Melbourne. I must have seen 100 stores and nobody would give me a job until I saw Sam at Reservoir, and he basically said, can you speak Italian? I said yes,” Verrocchi told The Australian.
“And he said you might be my boy (trainee). He then said no, but then he rang me back later and said yes. That started what has been a lovely relationship from then on.”
That partnership has turned into one of Australia’s biggest retail success stories, with the Chemist Warehouse Group now boasting almost $7.9bn in annual sales across more than 600 stores in Australia, New Zealand, Ireland and China.
“We have found our way into the Australian psyche,” Damien Gance, Sam’s son and now Chemist Warehouse’s chief commercial officer, told analysts on Monday in describing this company’s famous discount retail business.
“Visiting a Chemist Warehouse is simply part of what Australian families do. It is part of our collective every day.”
The two families involved in the deal, Verrocchi and Gance, will emerge with a combined $5bn in cash and shares as a result of combining their business with Sigma in an ASX-listed entity expected to have a market capitalisation of about $8.8bn.
Sigma expects $60m in costs saving synergies annually and pre-tax and interest earnings of about $495m from the combination of wholesaling and franchise pharmacy businesses, 600 stores, online sales and 16 distribution centres across Australasia.
Chemist Warehouse shareholders will own 85.75 per cent of the merged company, a deal that will be subject to approval from the Australian Competition and Consumer Commission.
The Gance brothers and Verrocchi and will hold about 49 per cent of the combined entity’s shares, which will be subject to escrow conditions, and other non-escrowed Chemist Warehouse shareholders will have almost 37 per cent.
Verrocchi’s stake will be worth almost $2bn, and the two Gance family members will have about $2.3bn worth of shares. Sigma chief executive Vikesh Ramsunder will stay as managing director.
The Chemist Warehouse founders have long considered an initial public offering on ASX, but Verrocchi said the sheer cost was an issue.
“I’m no banker but what I saw with an IPO is it’s extremely expensive, hundreds of millions of dollars, and it’s a long process” he said.
“I think this deal is quick, effective and gives us a pathway to the ASX, which is a good liquidity [event] for us and our shareholders.”
Chemist Warehouse has been an intensely private business for decades, and when asked if he was ready for public scrutiny in a listed entity – Verrocchi will sit on a combined board with Jack and Damien Gance and Chemist Warehouse executive director Danielle Di Pilla – Verrocchi quipped: “No!”
“The truth is it’s just not who I am, and Jack [Gance] is pretty much the same. We spent 50 years heads down, bum up, doing what we needed to do”
There has long been an element of mystery about Chemist Warehouse, though, which Damien Gance tried to play down with a joke about expectations about the group’s business model being “something far sexier than what is our reality.
“Unfortunately, what we do is fairly mundane. Whittle away what we do and distil it down to its core: we are a franchisor and a wholesaler.
“We supply the consumer goods you find in the non-dispensary part of a Chemist Warehouse. We provide franchise services to our franchise pharmacy. We give them access to our IP, and we sell them stuff. That’s the grand reveal.”
It is a model that works: 67 per cent of a store’s sales is “front of house” good like vitamins and toothpaste, against an average of 27 per cent at other pharmacies.
Having access to public market capital will help Chemist Warehouse’s future growth too.
It has six stores in Ireland, the start of what Verrocchi calls a European expansion plan, and he says there is still room for plenty more growth in Australia both in a retail sense and online, where the group does about $300m in annual sales.
“We understand that we’re on this long journey, and that we have always aimed for the stars – and that’s not changing,” Damien Gance said.
“We also understand that to get to the stars, you need a rocket, and getting into the public markets is probably the way to either produce the rocket or generate the rocket fuel.”
Verrocchi admitted succession planning could also be part of the strategy in going public, even though the families intend to be part of the business for some time.
“I’ve been doing this for a long time, and I’m getting towards the end of my time. If you’re a responsible CEO or founder, you have to create the next thing and the people who have followed you are at a time of their lives in their 40s or 50s where they can leave a pathway for the next people.
“But just when you think that everything is finished, you realise it is just the beginning. And that’s a bit like that here.”
The founders’ shareholding is escrowed until mid to late 2025, when they can sell down 10 per cent. Their remaining stake comes out of escrow the following year.
The merger is tipped to be completed in the second half of next year, pending regulatory approvals.
“Obviously we wouldn’t be recommending this if we didn’t believe we had any prospect of this not being approved,” Ramsunder said.
As for any celebrations, Verrocchi made a quip about Jack Gance’s parsimonious ways and that he may buy McDonald’s to mark the occasion, before adding: “We’ll celebrate when this is signed off.”
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