A $9 billion pharmacy Goliath is born, and not everyone’s delighted

For all the chest-beating on the perils of shrinking competition, the ACCC has supplied obstetrics services to the birth of a pharmacy and healthcare Goliath in approving the merger of Chemist Warehouse and Sigma.

The new mega-chemist and wholesale supplier will be to retail pharmacies what Bunnings is to hardware, what JB Hi-Fi is to electronics or what Dan Murphys is to booze.

This blended owner-franchise group will have 950 retail stores and will be one of the leading wholesale distributors of prescription medicines and provide products to more than 4000 community pharmacies.

Sigma and Chemist Warehouse can thank the big supermarkets for jumping that hurdle. Credit: Dominic Lorrimer

There is virtually no corner of the industry or the community that this merger will not touch.

As eyebrow-raising as it might be to have the Australian Competition and Consumer Commission give this deal the green light, it serves as a reminder that there are legal parameters that govern any decision by the regulator. The test is whether a merger is likely to substantially lessen competition.

And whether the plethora of small independent pharmacies approve, Chemist Warehouse and Sigma passed that test.

In large part, Sigma and Chemist Warehouse can thank the big supermarkets for jumping that hurdle.

While we might think about pharmacies as dispensers of medicines, for many retail outfits – particularly the big ones such as Chemist Warehouse and Amcal (which is part of Chemist Warehouse and Sigma) – it’s the over-the-counter and front-of-store products that dominate their earnings. Perfumes, skin care, toothpastes, personal hygiene ... the list goes on.

The big supermarkets compete strongly in these segments.

So after 10 months of deliberations and a range of concessions from the merging parties aimed at fortifying wholesale supply and protecting the Sigma franchisee pharmacies, the ACCC has concluded that enabling a dominant player in the industry won’t damage it.

Sigma countered initial fears from its contracted franchisees by offering them a path to exit the network. It also promised to restrict the collection and use of customer and franchisee data to ring-fence it from being accessed by Chemist Warehouse.

“To help ensure those pharmacies in longer-term contracts are able to switch easily to a new wholesaler or banner group, we accepted an undertaking that requires Sigma not to enforce contractual restrictions on exit and ensures payments under contracts do not make it costly for a pharmacy to switch,” ACCC chair Gina Cass-Gottlieb said.

Thanks to the ACCC green light, it was off to the races for Sigma shareholders. Technically, this listed company will buy the unlisted Chemist Warehouse, but in practical terms it is a back-door listing and reverse takeover.

The founders of Chemist Warehouse will emerge with control of the combined entity, which will boast earnings of almost half a billion dollars, plenty of access to merger cost-cutting and further potential for expansion.

It’s a good deal for Jack Gance, chairman and co-founder of Chemist Warehouse.Credit: Eamon Gallagher

The prospect encouraged salivating investors to push Sigma’s share price up 23 per cent. The emergence of a sizable health care/retail company with a strong business model, brand and earnings is just the kind of company that Australian investors want.

As I noted 11 months ago, there is lots to like about this deal – most particularly that the marriage of these two companies is symbiotic. They both bring complementary assets to the union.

But it is Chemist Warehouse that brings the heft, and a long history of growing a large and successful business from scratch.

After decades of private ownership, the two billionaires who built the Chemist Warehouse empire, Jack Gance and Mario Verrocchi, will be given an exit strategy.

They are getting together with the smaller, but publicly listed Sigma – transforming the combined listed entity into one that will be large enough to excite the interest of institutional shareholders.

The escrow provisions preventing the two founders from selling their combined 49 per cent stake will be fully lifted after the company’s results in August 2026.

This could be viewed as positive in that there will be more shares available to outside shareholders over time.

The negative take on this is that the brains behind the highly successful Chemist Warehouse could cash in their chips in a couple of years.

But for now, welcome to the new chapter in big box chemist retail.

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