Proxy advisory firms support Wesfarmers’ $760m bid for Australian Pharmaceutical Industries

All four of Australia’s influential proxy advisory firms have backed Wesfarmers’s $760m takeover bid for Priceline owner Australian Pharmaceutical Industries.

A takeover for Wesfarmers will end a long-running tussle for Priceline owner API, which had earlier included a higher, unsuccessful proposal from the conglomerate’s retail rival Woolworths. Picture: AAP

All four of Australia’s influential proxy advisory firms have backed Wesfarmers’s $760m foray into the pharmacy sector, recommending shareholders of Australian Pharmaceutical Industries accept the conglomerate’s $1.55 per share takeover offer.

The recommendations come after several institutional investors made public their concerns about the takeover offer, suggesting Wesfarmers should increase the bid.

With just over a week to the vote, advisory groups including Institutional Shareholder Services and Ownership Matters have told shareholders they should vote in favour of the deal.

In a report, ISS said the price was “an attractive premium” and the transaction offered “certainty of value through all-cash consideration for shareholders, especially noting a number of risk factors for API’s business”.

Among those risks, ISS said, was a lawsuit brought against the company’s Priceline division by an unknown number of franchisees – but lawyers for those plaintiffs have now confirmed they will withdraw the proceedings.

“The offer price is well above the company’s recent trading price, although noting that it is below the trading prices of near $1.73 in the period that Woolworths’ non-binding offer was on the table,” the ISS report reads. “Prior to this, API shares have not traded above the offer price since December 2018.”

A takeover for Wesfarmers will end a long-running tussle for API, which had earlier included a higher, unsuccessful proposal from the conglomerate’s retail rival Woolworths.

Wesfarmers first approached the company in July, offering $1.38 per share. It said it had entered an agreement with Washington H. Soul Pattinson, API’s largest shareholder, to acquire its 19 per cent stake in the pharmacy operator.

After that bid was rejected, Wesfarmers increased its offer to $1.55 per share. But Sigma Healthcare – which runs the Amcal and Guardian chemist chains – in September made a bid that had an implied value of $1.57 per share. However, this was partly scrip, which would have meant API shareholders owned 48.9 per cent of the combined group.

Sigma later withdrew that offer after Wesfarmers indicated it would vote its 19.3 per cent stake against it. It warned Woolworths it would do the same after the retailer made a higher bid in December, a proposal withdrawn the following month.

Grant Thornton, the independent expert, in February concluded that the Wesfarmers proposal was fair and reasonable and in the best interests of API shareholders, in the absence of a superior proposal. It said the underlying value of the company was between $1.48 and $1.78 per share, putting the Wesfarmers bid squarely within the range.

This was cited as a key reason why Ownership Matters, another proxy advisory firm, recommended shareholders agree to the takeover, describing the bid as an “acceptable premium” to the share price before the auction for the company.

The Australian Council of Superannuation Investors, in its note, said: The API board rejected the initial $1.38 cash proposal from (Wesfarmers), before also granting due diligence to two other potential bidders in Sigma Healthcare and Woolworths. A competitive auction process allowing appropriate value to emerge appears to have been conducted by the API board.”

Both Harvest Lane Asset Management and Investors Mutual, which owns shares in API, have queried the price and whether the normalisation of trading as the country exits harsh Covid-19 restrictions would lead to a higher valuation for the company.

In early February, the Australian Competition & Consumer Commission gave Wesfarmers the green light to proceed with the takeover, saying it would not oppose the deal.

It said that a takeover by Wesfarmers was unlikely to reduce competition within the market because there were already many large and well-established businesses in the sector that would compete “strongly” with API including Chemist Warehouse, Woolworths and Coles.

The regulator conceded that while most stakeholders had little concern about the owner of Kmart and Bunnings acquiring API, a small number of industry participants were worried about competition. “After considering these concerns, the ACCC maintained its view that the proposed acquisition would not have the effect or likely effect of substantially lessening competition,” the consumer watchdog said.