Sigma proposes merger with API

LEADING drug retailer Sigma Pharmaceuticals has made a $566 million play for struggling rival Australian Pharmaceutical Industries.

LEADING drug retailer Sigma Pharmaceuticals has made a $566 million play for struggling rival Australian Pharmaceutical Industries.

Sigma and API would merge under the $2.20-per-share deal, which is yet to be finalised and is so far deemed "informal" by the purchaser.

Shares in API were trading at $2.36 when the announcement was made and finished at that price at the close of trade yesterday. The deal is conditional on informal approval from the Australian Competition and Consumer Commission.

Sigma runs the Amcal and Guardian pharmacy chains while API is associated with Soul Pattinson, Priceline and Chemworld, as well as around 215 New Zealand chemists.

"Merging the two companies would create significant shareholder value ... due to strategic and cost synergies," Sigma managing director Elmo de Alwis said yesterday.

Sigma said the offer price represented a 33.5 per cent premium over the average consensus price published by leading stock brokers.

Takeover speculation in recent weeks has bolstered API shares, despite a string of bad news from the company.

API wrote off $22 million due to a computer glitch this year, leading to a 41 per cent fall in unaudited annual profit to $20.56 million.

The earnings downgrade, posted this month, was also caused by increased depreciation and higher interest.

API shares were trading at a low of $1.86 in early August, but spiked last week at $2.67 when the company told the Australian Stock Exchange it had received informal approaches.

API said the following day that these were merely informal phone calls about certain divisions in the company. Deutsche Bank healthcare market analyst David Low said the offer, which was below market value, was "unusual".

"However, undoubtedly the market was already speculating about the potential for corporate activity," Mr Low said.

The proposal is also conditional on a 90 per cent minimum acceptance, no material adverse change occurring, and any other necessary regulatory approvals.

"Sigma has also requested of API's board that it be allowed to conduct due diligence, which may lead to further conditions being required," Sigma said yesterday. Market rumour previously was that retailers Coles Myer and Woolworths were looking at the company, as well as diagnostics outfit Symbion.