Wesfarmers lobs $687m takeover of Australian Pharmaceutical Industries

Wesfarmers has lobbed a $687m takeover of Priceline owner API. But don’t expect pharmacies to pop up at Bunnings, Kmart or Target.

Wesfarmers CEO Rob Scott says he supports the community pharmacy model which bans big box retailers from dispensing prescription medicine. Picture: Marie Nirme

Wesfarmers chief executive Rob Scott says the company’s $687m takeover bid for Priceline owner Australian Pharmaceutical Industries will not seek to copy and resurrect Woolworths’ plan to install pharmacies across its stores.

Wesfarmers is offering $1.38 a share - a level API has not reached since late 2019 before the onset of the Covid-19 pandemic and lengthy lockdowns, which have battered Priceline stores, particularly in CBDs.

API shares surged 20.5 per cent to $1.38 in early trade, before closing at $1.37, eroding the premium Mr Scott highlighted as part of Wesfarmers’ takeover offer.

While Mr Scott said Wesfarmers had been keen on expanding into healthcare for some time, after divesting its coal mining operations and spinning off Coles, he ruled out pursuing a US-style pharmacy mode where prescription medicines are sold at big boss retailers, such as Walmart.

Instead, if the takeover is successful, he said API would “form the base” of a new division inside Wesfarmers.

“Wesfarmers supports the community pharmacy model, which is obviously a critical part of API’s business,” Mr Scott said.

“We don’t actually see a huge amount of synergy because we see the opportunity is really about investing in the business, and in this new division for the future. We see this as a very distinctive offering business to our other breakout businesses.

“So the growth, or the improvement, we would look to achieve over time would really be as a result of the investment that we would need to make.”

The federal government has blocked big retailers from operating pharmacies since 1990. Under current legislation pharmacists must own pharmacies. But that hasn’t stopped some from trying to overturn the law, notably Woolworths, which even registered the trademark “Pharmacy-in-supermarket” and renewed that registration in 2013 after its previous application lapsed.

But Mr Scott said the key part of Wesfarmers’ success was each of its businesses having clear separate offerings, not blending different services and products.

“When you think about businesses like Kmart or Officeworks or Bunnings, what makes them successful is the clarity and focus of their offer,” he said.

“The exciting thing about API is that creates a whole new network, well located stores throughout the community that we can then explore opportunities - with the Priceline franchisees, but also with other community pharmacists. So that‘s where our focus would be.”

Wesfarmers CEO Rob Scott ruled out pursuing a US-style pharmacy mode where prescription medicines are sold at big boss retailers, such as Walmart. Picture: Dan Peled

Mr Scott did not reveal how long Wesfarmers had been circling API, saying that the company had been keen on branching into healthcare for some time. But he said it was only last week API’s biggest shareholder, Washington H. Soul Pattinson, seriously entertained overtures from Wesfarmers to sell its 19.3 per cent stake in API. Wesfarmers has now secured a call option on the stake, which Mr Scott said would help smooth the way for a takeover to proceed.

Washington H. Soul Pattinson chairman Robert Millner described the Wesfarmers offer as a “good opportunity for API shareholders”.

He said the decision to vote Soul Pattinson’s stake in favour of the Wesfarmers’ offer had followed more than 20 years of trying to expand the business of the pharmaceutical company.

He said this had included the API bid for Sigma Healthcare and a possible deal with manufacturer FH Faulding.

Mr Millner noted Wesfarmers “have a very good track record of running retail operations” which was shown by its former ownership of Coles as well as Bunnings, Officeworks and Kmart.

“You would have to support them,” he added.

API’s board said in a statement it was undertaking an analysis of whether Wesfarmers’ proposal is “reflective of the long-term growth prospects of API and the expected short-term impacts of the pandemic-related lockdown restrictions”

“In the meantime, API shareholders should not take any action in relation to the indicative proposal,” API said.

It comes as API’s CBD Priceline Pharmacy stores have been battered during Covid-19 lockdowns, particularly Melbourne’s epic 140-day shutdown last year.

Working from home, combined with a dramatic scaling back of events from the Spring Racing Carnival to simply eating out, hammered API’s overall profit, which fell 29.3 per cent to $15.9m, in the six months to February 28.

Register revenue across Priceline plummeted 10.7 per cent to $526m, while gross profit across stores fell 8 per cent to $103m. And a recovery is difficult to predict as more workers swap the commute for a laptop and Zoom.

API chief executive Richard Vincent has threatened to close Priceline stores if API fails to renegotiate lease agreements with its landlords.

“We continue to renegotiate leasing agreements with our CBD landlords and these negotiations are helped by our proven determination to close stores where we cannot achieve satisfactory rental agreements,” Mr Vincent said at the company’s half-year results in February.

On Monday API announced it would stop manufacturing products in New Zealand to focus on its pharmaceutical distribution and two retail business, Priceline and Clear Skincare. He said ceasing manufacturing in New Zealand would boost the company’s coffers by $9.7m this year.

“By simplifying our operations and focusing on our two retail-facing businesses it will allow us to escalate our investment in our digital capabilities and accelerate the initiatives that will improve our customer experience in both our Priceline Pharmacy and Clear Skincare networks,” Mr Vincent said.

“We anticipate that consumer brands will generate in the order of $5m incremental earnings before interest and tax (EBIT) per annum after we have wound down manufacturing in New Zealand by the second half of fiscal 2023. By moving to outsourced contract manufacturing we will generate lower cost of goods and have greater continuity in product supply, both of which have been impeded by Covid-related impacts.

“Taking into account the proceeds from the sale of the plant, we anticipate a net effect of $24.5m at the EBIT level. This one-off charge contains the carrying value of plant and equipment, inventory, employee and make good costs.”

Mr Vincent said this would involve “largely non-cash adjustments” and the cost incurred in ceasing manufacturing in New Zealand will have no impact on the likely dividend payment.

Wesfarmers’ proposal is also conditional on completing due diligence and Australian Competition and Consumer Commission clearance.

Moody’s Investors Service vice president Ian Chitterer said the takeover proposal will have “no effect” on Wesfarmers credit profile, “should it be successfully executed”.

“The transaction would be funded through existing cash and debt facilities, and even after the acquisition, Wesfarmers will have strong liquidity for its rating level,” Mr Chitterer said.

“We affirmed Wesfarmers’ ratings in June, incorporating our expectation that the company will remain acquisitive and that management will maintain an appropriate leverage level for its credit profile based on its conservative track record.”