Wesfarmers pounces on 19.3% stake in Priceline owner API, despite Sigma’s ‘more favourable’ bid

Wesfarmers has upped its ante in the takeover battle for Priceline owner, Australia Pharmaceutical Industries, seizing a 19.3 per cent stake in the company.

Wesfarmers boss Rob Scott has pulled the trigger on a call option for a 19.3 per cent stake in Australia Pharmaceutical Industries. Picture: Colin Murty

Retail titan Wesfarmers has upped its ante in the takeover battle for Priceline owner, Australia Pharmaceutical Industries, seizing a 19.3 per cent stake in the company, despite facing competition from a “more favourable” bid.

Wesfarmers could only exercise that option in absence of a superior bid, and API’s board is currently assessing another offer from Australia’s biggest pharmaceutical wholesaler Sigma Healthcare.

While the API board said Sigma’s cash and scrip bid — worth about $773m or $1.57 a share at the time it made its offer — was more favourable than Wesfarmers’s all cash offer of $1.55, it is yet to label it more superior.

Regardless, Wesfarmers pulled the trigger on acquiring the 19.3 per cent stake in API, belonging to Washington H. Soul Pattinson on Thursday morning, in an apparent effort to accelerate takeover talks.

“Exercising our option to acquire 19.3 per cent of API reflects the group’s commitment to the transaction and the continued progress of the Wesfarmers proposal,” Wesfarmers chief executive Rob Scott said.

It is understood Wesfarmers was concerned a deal could be protracted by months, with Sigma’s biggest shareholder Allan Gray demanding a shareholder vote on the takeover proposal, which if successful would be subject to competition regulatory approval.

Wesfarmers seized on API’s vague language when Sigma lobbed its bid last week. While API said Sigma’s bid was more “favourable” it stopped short of recommending Sigma’s offer, and it was that wording that Wesfarmers believed gave it permission to pounce.

Galvanising its decision to exercise the call option was Sigma’s shares sliding to 57c on Wednesday – and it remained at that level on Thursday – reducing the value of its bid by 5c to $1.52 a share.

“Wesfarmers exercised its option to acquire the shares from WHSP under the terms of the undertaking agreement following the announcement of Sigma’s proposal, which the API board has not recommended,” Wesfarmers said in a statement.

This is despite the option agreement stating that: “Wesfarmers may only exercise the option if a public announcement of a competing proposal is made, provided that, where the board of API has announced that the competing proposal is a superior proposal.”

“Wesfarmers must also announce or otherwise formally propose to API a proposal that Wesfarmers determines, acting reasonably, provides an equivalent or superior outcome for the shareholders of API as a whole compared to the competing proposal, after giving effect to any matching rights available to Wesfarmers, in order to be entitled to exercise the option.”

The option agreement also prevented Sigma entering talks with Soul Patts on acquiring the 19.3 per cent stake. Now Wesfarmers is API’s biggest shareholder, it puts more certainty around its bid, given it can purchase more shares, weakening Sigma’s proposal.

Despite Sigma’s bid weakening from its share price fall, Sigma chairman Ray Gunston maintained it was more compelling for API shareholders than Wesfarmers’s.

“Sigma continues to consider its proposal is superior to Wesfarmers’ proposal, particularly given the $45 million of operational synergies per annum that would be created for API and Sigma shareholders,” Mr Gunston said.

API said in a statement to the ASX last week that its shareholders should take no action after it allowed Sigma to conduct due diligence in parallel with Wesfarmers.

“Following careful consideration and consultation with its advisers, the API board has determined that the Sigma Indicative Proposal is reasonably capable of being valued and completed and would reasonably be likely to be, if completed substantially in accordance with its terms, more favourable to the shareholders of API as a whole than the latest proposal provided by Wesfarmers to API, notwithstanding that it would likely take an overall longer period of time to implement,” API said.

“On this basis, the board believes it is in the interests of API’s shareholders to progress the Sigma Indicative Proposal and allow Sigma to undertake confirmatory due diligence to facilitate a binding offer in parallel with the confirmatory due diligence being offered to Wesfarmers.

“At this stage API shareholders do not need to take any action in relation to the Sigma indicative proposal.”

The market was already betting on Wesfarmers being the likely suitor. Although API shares firmed 1.7 per cent to $1.52 on Thursday – it was still 3c below Wesfarmers’s offer price.

For Sigma, it appears it left its chance to acquire API too late. API proposed a merger with Sigma two years ago, but was firmly rebuffed. Then last year, Soul Patts approached Sigma offering to sell its 19.3 per cent stake for as low as $1.10 a share.

Mr Scott said that the Wesfarmers proposal would deliver an “attractive premium and certain cash return” to API shareholders.

“Wesfarmers continues to see opportunities to invest in and strengthen the competitive position of API and its community pharmacy partners.”