ACCC raises competition concerns on Chemist Warehouse merger with Sigma
The $8.8bn backdoor merger of retail juggernaut Chemist Warehouse and Sigma Healthcare could mean higher prices for consumers, the ACCC has said.
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The billionaire backers of the Chemist Warehouse reverse takeover of Sigma Healthcare, the Gance and Verrocchi families, have hit a major snag in their audacious $8.8bn bid to have their juggernaut retailer listed on the ASX after the competition regulator raised five “amber lights” on the deal that if not rectified or satisfied could derail one of the biggest market listings in years.
Amid the cost of living crisis, the Australian Competition and Consumer Commission has highlighted in its preliminary report that the combination of a strong retailer in Chemist Warehouse with a dominant wholesaler in Sigma could mean higher prices for consumers, which could emerge in coming months as a significant ‘red flag’ for regulators but crucially too to their political masters as they battle to help stretched households manage bloated bills.
Although the owners of Chemist Warehouse, the families led by co-founders Jack Gance and Mario Verrocchi, will gain some relief and optimism that the ACCC did not issue any ‘red lights’ over the proposed $8.8bn merger of the chemist chain with Sigma, which in the past has been enough to kill a merger deal, the competition regulator published its statement of issues on Thursday that canvassed a number of concerns around the impact to competition if the deal were to go ahead in its present form.
ACCC commissioner Stephen Ridgeway told The Australian the ACCC had five “amber light” concerns which might be enough to scuttle the merger or force a major restructure of the deal.
“It can be. This is only the first part of the process and depending on what submissions, arguments, information and documents we get and whether the (merger) parties offer up remedies, we will see.
“But more commonly than not, this number of amber light concerns would lead to a rejection, a no decision, but there have been occasions … where it has been turned around, even from a red light issue to a clearance,” Mr Ridgeway said.
Although the ACCC is yet to make any final decision on the deal or reach any final view on its competition concerns, the initial response to the proposal will send a shudder through the ranks of Sigma investors, the family backers of Chemist Warehouse and possibly one of Sigma’s largest shareholders, former merchant banker David Di Pilla’s funds management empire HMC Capital.
“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” Mr Ridgeway said on Thursday.
“This lessening of competition may lead to reduced service quality for goods and services provided in pharmacies as well as higher prices for consumers. The transaction may also weaken the competitiveness of the different product and services offered by Sigma’s banner pharmacies.
“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level.”
If the merger was to go ahead it would create a new and powerful force in the pharmacy sector, particularly a company that was uniquely vertically integrated across multiple levels of the pharmacy supply chain. Sigma is one of the largest wholesalers of prescription medicines, over the counter and front of store products. Sigma also provides brand and support services to community pharmacies operating as franchisees under Sigma banners such as Amcal +, Discount Drug Stores, PharmaSave and Guardian.
Chemist Warehouse is a franchisor of pharmacies and retail stores under the brands Chemist Warehouse, MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse. It is also a wholesaler and distributor, and provides brand and support services to its franchisee pharmacies.
Combined, the Sigma-Chemist Warehouse group would have 950 pharmacy stores under its banner with 16 per cent market share, making it the strongest player in the market and ahead of EBOS with around a 12 per cent market share and API, owned by Perth-based conglomerate Wesfarmers, holding an 8 per cent slice.
The headache and doubts for the ACCC are many and centre around the domination of the wholesale and retail markets, the impact to Sigma-aligned pharmacies and consumers.
For example, the ACCC cited, currently Sigma is incentivised to maximise wholesale sales, but after the transaction, the independent pharmacies it supplies will also be competitors to Chemist Warehouse.
“In particular, we are focused on how the newly merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive,” Mr Ridgeway said.
“This new business model for the pharmacy sector could raise barriers to rivals expanding or entering, which may lessen competition.”
In addition, the ACCC is concerned the proposed acquisition may substantially lessen competition in pharmacy retailing because it could reduce the competition Chemist Warehouse and Sigma’s banner stores impose on each other.
The ACCC is also concerned that the proposed merger may enable Chemist Warehouse to access and use commercially sensitive data relating to pharmacies supplied by Sigma, in a way that damages competition.
“Following the acquisition, the merged company may be able to use insights from data obtained to target pharmacies that rival Chemist Warehouse or pre-empt and undermine them,” Mr Ridgeway said.
“Currently independent pharmacies have three main choices for wholesale supply, and banner, franchise arrangements, but given the potential data concerns and risk of competitive harm, the effective options for some pharmacies may reduce to two.”
In response to the ACCC statement, Sigma said the release of the statement of issues was not unexpected for a proposed transaction of this complexity and that it still held the deal would not lessen competition.
“As the ACCC indicates, the statement of issues reflects preliminary views on potential issues, which the ACCC will continue to consider. Sigma and Chemist Warehouse consider there are good arguments why the proposed merger will not lessen competition and will continue to engage with the ACCC to address its preliminary views and any potential concerns,” it said.
Sigma CEO Vikesh Ramsunder said: “We are co-operating closely with the ACCC and look forward to continuing to do so in the next phase of the merger review. The proposed transaction will ensure that Sigma, consistent with its regulatory obligations, can continue to serve franchisee and independent pharmacies alike with a competitive offering, whilst delivering a transformational change for all Sigma stakeholders.”
A Chemist Warehouse spokesperson said: “Chemist Warehouse Group is committed to fully co-operating with the ACCC and will continue to engage in the process to ensure the Commission has all the information required to complete their assessment.”
Shares in Sigma ended down 4.5c at $1.16.
In December Chemist Warehouse unveiled its ambitious plan to emerge as an $8.8 healthcare and retail powerhouse on the ASX as part of a reverse takeover deal with commercial partner and chemists group Sigma Healthcare.
The deal would see Chemist Warehouse billionaire co-founders Mr Gance and Mr Verrocchi join the board of the ASX-listed Sigma when it finally absorbs the Chemist Warehouse business if approved. The duo’s respective families emerge as the largest shareholders of the combined conglomerate with a stake of around 49 per cent.
Mr Gance and Mr Verrocchi, who built Chemist Warehouse with sales of their centrally-held private company CW Group Holdings topping $3bn, are also set to take several hundred million dollars off the table to throw extra cash into their warchests.
Chemist Warehouse, which opened its first store in Melbourne in 2000, now operates over 500 stores across Australia, employing more than 17,000 people. According to IBISWorld, the company is the third-biggest pharmacy operator in terms of revenue, holding 12.9 per cent of the market behind Sigma and EBOS, which control 14.2 per cent and 13.9 per cent respectively.
In March Sigma released its latest financial results, which published for the first time the accounts for Chemist Warehouse, and which showed a full year net profit of $4.5m, up about 150 per cent on the previous year’s result, on revenue of $3.32bn, down 9.2 per cent. The issued first-half accounts for Chemist Warehouse revealed its revenue rose 5.5 per cent to $1.77bn, while net profit was $360.1m, up 104 per cent.
CW Group, which is controlled by the Chemist Warehouse founders, made a net profit of $302m for the year to June, down 22 per cent from the $385m it made a year earlier. However, revenue reached $3.09bn compared to $2.99bn in 2022 as the company continued with new Chemist Warehouse store openings in New Zealand, China and Ireland.
The ACCC invites submissions from interested parties by 27 June 2024 as it further investigates the deal. It is set to make a final decision on September 5.
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