Sigma offers franchisees an escape clause in bid to seal $8.8bn Chemist Warehouse deal

The competition regulator’s decision on the $8.8bn merger of Sigma Healthcare and Chemist Warehouse has been pushed back to allow consultation on new Sigma undertakings.

Sigma will allow franchisees to break their agreements in a bid to appease competition concerns.

Sigma Healthcare is offering franchisees who joined its network before the start of this year the ability to break their deals with the company without penalties, as a concession offered to help get its $8.8bn merger with Chemist Warehouse over the line.

The Australian Competition and Consumer Commission has also pushed back the scheduled date for a decision on the deal, from October 24 to November 7, to allow for a new round of consultation on the concessions offered by Sigma, which were revealed on Tuesday.

Sigma shares surged more than 10 per cent to a 12-month high of $1.60 on the news.

The ACCC started consultation in June over possible competition concerns around the deal between Sigma and Chemist Warehouse, which was announced in December last year.

As well as being a major wholesaler to companies including Chemist Warehouse, Sigma also provides brand and support services to almost 400 community pharmacies which operate as franchisees under the Amcal and Discount Drug Store brands.

In its statement of issues released in June, the ACCC said it had concerns that the increase in vertical integration caused by the proposed merger “may make entry and expansion at a single level in the supply chain less viable’’.

“This has the potential to raise barriers to entry and significantly alter competitive dynamics in the industry,’’ the ACCC said.

“The ACCC is considering whether this may constitute a substantial lessening of competition.

“The vertical integration due to the acquisition would sit alongside the growth of pharmacy banner groups, which has increased centralised control or influence over individual pharmacies.’’

The ACCC said it was also concerned that the proposed merger might “lessen the competitive constraint’’ which Sigma and Chemist Warehouse currently imposed on each other, “which may lead to increased prices for the goods and services provided in pharmacies and/or reduced service quality’’.

The ACCC was also concerned the deal could reduce retail competition in certain local markets.

There were also concerns that Sigma, as a wholesaler, had access to independent pharmacies’ commercial data, which could cause competition issues if independents decided to limit their trading with Sigma over concerns around the use of that data.

Sigma has offered to enter into court enforceable undertakings to address the concerns raised, the ACCC said on Tuesday.

These included that it would “not prevent or hinder franchisees who entered into their franchising arrangements prior to 1 January 2024 from terminating their franchise agreements with Sigma, for a period of three years’’.

Sigma would also waive its right to recover contributions it had made under its franchise agreements and future fees payable to Sigma.

Sigma would also undertake to “place restrictions on the collection, use and disclosure of confidential data and information from Sigma wholesale customers and franchisees for a period of three years”.

It would also remain a participating pharmaceutical wholesaler under the Commonwealth Government’s Community Service Obligation arrangements for at least five years.

ACCC chair Gina Cass-Gottlieb said the regulator was now seeking feedback about whether the undertakings would be capable of addressing the competition concerns arising under the merger proposal.

The ACCC will be accepting a new round of submissions on the proposed undertakings until October 14, and has pushed back the scheduled date for a decision on the merger from October 24 to November 7.

In a short statement to the ASX on Tuesday, Sigma said it would continue to work cooperatively with the ACCC and welcomes the public consultation process.

Both Sigma and Chemist Warehouse last week delivered strong trading results, with the latter reporting a full year net profit of $539.7m, up from $302.5m the previous year, on revenue of $3.29bn, up from $3.09bn.

Sigma reported normalised net profit for the half year to the end of July of $13.7m, up 303.6 per cent before costs associated with the merger were accounted for, on revenue of $1.84bn, up 17.3 per cent.

Originally published as Sigma offers franchisees an escape clause in bid to seal $8.8bn Chemist Warehouse deal