Sigma’s biggest shareholder, Simon Mawhinney of Allan Gray, demands vote on API takeover

Sigma’s biggest investor, Simon Mawhinney of Allan Gray, says shareholders should have a say on the proposed $770m takeover of API.

Simon Mawhinney, of Allan Gray, has called for a shareholder vote on Sigma’s $773.3m proposed takeover of smaller pharmacies rival, Australian Pharmaceutical Industries.

Sigma’s biggest investor is calling on the company’s board to allow a shareholder vote on its $773.3m bid for smaller rival Australian Pharmaceutical Industries – or it will start agitating for the removal of directors.

Meanwhile, it has emerged that Sigma could have saved more than $45m had it accepted an offer from API’s biggest shareholder, Washington H. Soul Pattinson, to sell its 19.3 per cent stake last year.

Simon Mawhinney of Allan Gray, which owns 10.1 per cent of Sigma, said the cash and scrip offer for API, without shareholders having a say, went against the “spirit” of ASX listing rules.

Under the proposal, Sigma is offering API shareholders 48.8 per cent of the company, topping up the rest of the bid with $170m cash. Mr Mawhinney said the deal was designed to “circumvent” reverse takeover rules.

“A very good recent precedent is the BHP Petroleum and Woodside Petroleum merger where Woodside ends up with 52 per cent of the company and BHP 48 per cent and Woodside has chosen to give shareholders a vote,” Mr Mawhinney said.

“It’s the right thing to do. There are listing rules that govern this. (Sigma’s bid for API) is the reverse. This is a reverse takeover in an economic sense.

“The advisers and bankers have structured it so that you get to just below the 50 per cent, or in other words reissuing 100 per cent of your shares that the reverse takeover comes in, and so they structured it so that it’s just below that, and then they’ve topped it up with cash.

“They can do that, that’s fine, but it’s … unfair and definitely very, very poor corporate governance.”

Mr Mawhinney spoke to The Australian 17 hours after airing his concerns with Sigma chairman Ray Gunston. Mr Mawhinney said while Mr Gunston said a shareholder vote was “not part of the initial thinking” and “not the way the deal has been structured”, he would take it on notice.

Mr Gunston told The Australian: “Allan Gray are a long-term shareholder and we value their views.

“There is no regulatory requirement for a meeting of Sigma shareholders for the transaction as currently proposed.

“We are committed to maintaining good corporate governance practices and will continue to engage with Allan Gray and all our shareholders to work through their views and bring appropriate context and balance to the conversation.”

The problem for Sigma is that if it makes its bid conditional on a shareholder vote it lessens the certainty of it being able to complete a potential deal, prompting API’s board to reconsider its recommendation to shareholders.

Currently, API’s board says Sigma’s proposal is “more favourable” than a separate offer from Wesfarmers, which has an all-cash bid of $763m or $1.55 a share.

Wesfarmers also secured the support of API’s biggest shareholder, Washington H. Soul Pattinson, which has agreed to sell its 19.3 per cent holding in the company to the retail conglomerate. Sigma had first dibs on this stake when Soul Patts approached its board last year, asking if they would like to buy it for $1.10-$1.15 a share.

If Sigma accepted Soul Patts’ offer, it would have saved more than $45m. But the timing was not right. The company was in the middle of completing its $300m distribution centre investment and declined Soul Patts’ offer, believing securing the holding would only make sense if it could realise plans in the immediate future.

The last thing it expected was Wesfarmers approaching Soul Patts in July about acquiring its stake in API, which operates the Priceline franchise, with the intention of lobbing a takeover bid for the pharmaceutical wholesaler.

The potential arrival of Wesfarmers – the country’s biggest retailer – in the pharmacy sector was enough to jolt Sigma into revisiting merger talks with API. API originally proposed a merger with Sigma two years ago but was firmly rejected.

Mr Mawhinney believes the fear of Wesfarmers shaking up the pharmacy industry has led to “economically irrational” decision making on Sigma’s board.

While Sigma says a merger with API would deliver $45m in cost savings a year and create a “stronger platform to operate in a changing landscape”, Mr Mawhinney says that if the deal is that good, then let shareholders vote on it.

“It’s imperative that shareholders of Sigma be afforded the opportunity to vote on this transaction,” he said.

“There are specific listing rules that govern this kind of thing, and they’re sailing very close to it and structuring it around that. It’s just wrong.”

Mr Mawhinney said if shareholders do not get a vote, he would push for an extraordinary general meeting to vote directors off the board.

He has form in this regard. Mr Mawhinney challenged Roc Oil’s proposed merger with Horizon in 2014 – a deal that would have left Horizon shareholders owning 58 per cent of the merged company, despite being the takeover targets.

Allan Gray owned a significant stake in Roc, so it challenged the merger at an EGM because it was not entitled to have a say in the deal to transform the company. The deal failed to proceed following the shareholder pressure and an alternative takeover offer emerging.

“It’s quite an unsettling thing to do and we don’t want to unnecessarily upset the apple cart,” Mr Mawhinney said about the prospect of voting directors off the board.

“Just give shareholders the vote.’’

API shares fell 0.3 per cent to $1.50 on Tuesday – 5c below Wesfarmers’s bid. Sigma shares, meanwhile, slipped 0.3 per cent to 60c. This compares with a 1.5 per cent drop across the broader share market.