Wesfarmers sweetens offer for Priceline owner API despite share slump

Wesfarmers remains in hot pursuit of Priceline’s owner API, so much so it has hiked its offer, despite its shares slumping.

Wesfarmers wants to create a stand-alone healthcare division via the potential acquisition of Priceline owner, Australian Pharmaceutical Industries. Picture: David Geraghty/NCA NewsWire

Hardware and retail conglomerate Wesfarmers has managed to successfully woo Priceline owner, Australian Pharmaceutical Industries, after it sweetened its offer to take over the pharmacy group.

Wesfarmers increased its bid by 17c to $1.55 a share on Thursday after API’s board rebuffed the company’s initial overtures in July.

API’s shares soared 16.1 per cent to $1.48 on Thursday — their highest level since April 2019 — reversing a slump following Wesfarmers’s first bid. Despite rising to $1.38 when Wesfarmers lobbed its initial offer, it shares had eased back to close on Wednesday at $1.27 before the conglomerate revised its bid.

It is understood that API had sought to re-engage merger talks with larger rival Sigma to create more value soon after Wesfarmers lobbed its first offer, which API’s board branded opportunistic.

So far nothing has come of any potential merger talks between API and Sigma. Still, Wesfarmers, which is keen to create a stand-alone pharmacy division, is hot pursuit of the company.

But Wesfarmers chief executive Rob Scott has ruled out seeking to lobby against changes to Australia’s community pharmacy laws, which stipulate that pharmacists must own pharmacies, preventing Priceline pharmacies being rolled out across Kmart, Target, Bunnings and other large format retail chains.

“Wesfarmers supports the community pharmacy model, including the pharmacy ownership and location rules. If the proposal is successful, we see opportunities to invest to strengthen the competitive position of API and its community pharmacy partners by expanding ranges, improving supply chain capabilities and enhancing the online experience for customers,” Mr Scott said.

The federal government has blocked big retailers from operating pharmacies since 1990. 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.

Mr Scott said Wesfarmers planned to create a separate healthcare division from a potential API acquisition, using it as a “platform from which to invest and develop capabilities in the growing health, wellbeing and beauty sector.”

Wesfarmers has already secured the support of API’s biggest shareholder Washington H. Soul Pattinson and a call option in its 19.3 per cent stake in absence of a superior offer.

API’s board said the revised bid — a 35.4 per cent premium on its closing price on July 9 — was high enough for it to consider recommending to shareholders unless a superior offer is made.

The group has now opened its books to Wesfarmers to complete due diligence, with the two companies entering a process deed, which grants Wesfarmers exclusivity until October 16 to form a binding offer.

“This revised offer better reflects the strength and potential of our stable of businesses that have been built by the efforts and passion of all of our people within API,” said API CEO Richard Vincent.

The revised proposal also includes the payment of fully franked dividends up to a maximum of 5c per API share, including any final dividend declared for the financial year ended August 32, 2021, with the cash consideration of $1.55 to be reduced by the cash component of any such dividends.

The offer assumes that the performance of API is consistent with the earnings guidance announced on July 12, including the earnings impacts from the extension of Covid-19 related restrictions beyond the end of July.

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 per cent to $15.9m for the six months to February 28.

Register revenue across Priceline dropped nearly 11 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.