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API proposes merger with Sigma Healthcare

Brands including Priceline Pharmacy, Pharmasave, Soul Pattinson Chemist and Chemist King could soon be run under one roof, with Australian Pharmaceutical Industries Limited (API) proposing a merger with rival healthcare business Sigma Healthcare Limited (Sigma).

Under the proposal, API is offering a 69.3 per cent premium on the Sigma share price as of close of trading on 13 December.

The premium equates to $0.686 for each Sigma share, which was priced at $0.405 as of the close of trading 13 December, frozen due to a trading halt made in anticipation of this announcement.

API chairman Mark Smith believes a merger is the best way to deliver significant benefits to both groups of shareholders, pharmacists and customers.

“In the face of slowing revenue growth, projected margin and revenue pressures due to Government policy and also increased competition, the merged business would provide scale and volume, which will give greater scope for the ongoing investment in technology that is essential to ensure a competitive, sustainable and efficient wholesale model in the future,” Smith said in an announcement to the ASX.

“Both API and Sigma share a proud history of supporting independent pharmacists and we are committed to maintaining that heritage and delivering enduring value to pharmacists and their customers.”

Smith said the merged entity would continue the retail brands of both businesses, bringing brands such as Priceline Pharmacy, Soul Pattinson Chemist, Clear Skincare, Pharmasave and Chemist King under one roof.

The proposal is subject to a number of conditions, including clearance from the ACCC and the completion of due diligence.

API lodged a substantial shareholder notice with the ASX on Friday, confirming it is currently holding almost 13 per cent of shares in Sigma, and noted that under its proposal Sigma shareholders would receive 0.31 API shares and $0.23 cash for each Sigma share owned.

Should the merger go through, API shareholders would own approximately 63 per cent of the combined entity, while Sigma shareholders would own the remaining 37 per cent.

“Our proposal is attractive for Sigma shareholders, in that it provides upfront cash payment and the ability to share in the upside from scrip in the merged company,” Smith said.

Shares in Sigma rose 43.21 per cent by the end of Friday 14, from $0.405 to $0.585 per share, while shares in API jumped from $1.470 to $1.632 per share – an 11 per cent increase.

Sigma suffered a blow to its business earlier in the year when it lost the contract to supply The Chemist Warehouse Group to competitor Ebos, causing annual net profit after tax to fall 50.6 per cent to $13.8 million.

At the time, the business announced a major restructure and cost reduction program in order to facilitate expansion opportunities and a re-engineering of the overall business.

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