Sigma shares soar 70pc after $8.8bn Chemist Warehouse deal as investors make their bets

Sigma shares hit a seven-year-high, triggering a $1.55bn rise in the fortunes of Jack Gance and Mario Verrocchi.

Shares in Sigma Healthcare soared more than 70 per cent on Wednesday to a seven-year high after the company’s stock returned to trading and investors rushed the pharmaceutical wholesaler to get a front seat to its planned $8.8bn merger with retail colossus Chemist Warehouse.

The decision to backdoor list through Sigma also triggered an instant leap in wealth for the Chemist Warehouse founders Jack Gance and Mario Verrocchi, with their combined wealth rocketing $1.55bn to $5.88bn based on the closing price for Sigma shares on Wednesday and the shareholding they will get in the newly merged ASX entity.

It comes as Sigma also finalised an institutional placement as part of the merger.

Sigma shares had been in a trading halt since Friday as merchant bankers, lawyers and the boards of Sigma and Chemist Warehouse began piecing together the historic backdoor listing of Chemist Warehouse into the ASX-listed Sigma vehicle, and when the shares came back on for trade it was rushed by speculators.

Shares in Sigma pounced more than 70 per cent to $1.35 in morning trade before closing the day up 36 per cent at $1.04.

Shares in HMC Capital, the funds manager and investment firm run by former banker David Di Pilla who is a cousin of Chemist Warehouse co-founder Mario Verrocchi, rose 6c to $5.48. HMC Capital is also a 19 per cent shareholder in Sigma through one of its managed funds, HMC Capital Partners Fund I.

This week Chemist Warehouse owners Mr Gance and Mr Verrocchi unveiled the highly awaited public listing of their pharmacy retail network which has bypassed a traditional IPO, bringing with it all the trappings such as a prospectus, to instead backdoor list through Sigma.

Under the proposed deal, Chemist Warehouse shareholders will hold 85.75 per cent of the new entity and Sigma 14.25 per cent, creating a listed company with an $8.8bn equity value.

Investors betting on a strong performance by Chemist Warehouse and wanting a front seat in the listing from the outset have rushed the stock, scooping up shares in Sigma when trading began on Wednesday even though when the backdoor listing is triggered they will be heavily diluted in favour of Chemist Warehouse shareholders such as its billionaire Gance and Verrocchi families.

Sigma, a major Australia-based pharmaceutical wholesaler and pharmacy franchisors, made the Chemist Warehouse announcement on Monday morning, announcing its intentions to acquire the Chemist Warehouse Group.

If successful, its founders Mr Gance and Mr Verrocchi will join the board, and Chemist Warehouse shareholders will also own 85.75 per cent of the new merged group, plus $700m in cash consideration.

In documents released to the ASX, Sigma Healthcare said the proposed merger would create a “full-service wholesaler, distributor and retail pharmacy franchisor”.

Sigma will also raise $400m in funds, managed by Goldman Sachs, to increase the working capital needed to implement the new supply contract with Chemist Warehouse.

In order for the deal to proceed, the Australian Consumer and Competition Commission and New Zealand’s Overseas Investment Office will need to approve the merger. Industry experts predict that the Australian Competition and Consumer Commission may force Chemist Warehouse and Sigma to shed some of their pharmacies to reduce their buying power if they do not knock back the proposed tie-up all together.

Shareholders from both groups will also vote to approve the deal, however Chemist Warehouse’s biggest shareholder, HMC Capital, has indicated it will vote in favour of the merger.

In a meeting with investors held on Monday morning, Sigma chairman Michael Sammells said the proposed merger would push both companies into a “transformational and compelling” direction.

“This is a rare opportunity to combine the core competencies of two strong healthcare businesses,” he said.

On Wednesday, Sigma announced the successful completion of the institutional component of its fully underwritten 1 for 1.85 pro rata accelerated non-renounceable entitlement offer to raise approximately $400m. The institutional entitlement Offer raised approximately $178m and was strongly supported by existing eligible institutional shareholders.

Take-up by existing eligible institutional shareholders under the offer and by HMC Capital Limited, the manager of Sigma’s largest shareholder, HMC Capital Partners Fund I, was 92 per cent, Sigma said.

“We are very pleased by the support demonstrated by existing and new institutional investors for the entitlement offer,” Sigma chief executive Vikesh Ramsunder said.

“The entitlement offer will fund increased working capital requirements and progress business growth initiatives, including relaunching our Amcal and Discount Drug Store brands and expanding our private and exclusive label product range.

“In the event the proposed merger proceeds to completion, and to the extent the proceeds have not been applied to fund working capital needs and new business initiatives, some of the net proceeds from the entitlement offer may instead be used to partially fund the cash consideration by Sigma under the proposed merger.”

Under the proposed Chemist Warehouse merger deal, a retail entitlement offer for Sigma shareholders will open on Monday and then close on January 19 with normal trading to commence for the merged Sigma and Chemist Warehouse company on January 30.

A spokesman for the ACCC said once the ACCC received a submission from the parties, the ACCC would commence a public review of the transaction.

“The public consultation will include seeking submissions and engagement with industry participants. Details of a public review will be posted on our public register.”