Sigma in mix for takeover of API

WESFARMERS is facing competition from Australia’s biggest pharmaceutical distributor, Sigma Healthcare, in the battle to take over Priceline owner Australian Pharmaceutical Industries.

Sigma, the owner of the Amcal and Guardian chemist brands, revealed its hand on Monday, lobbing a $773.3m bid for API. Sigma’s offer comprises 35c cash and 2.05 Sigma shares for every API share, which it said implies a value of $1.57 per API share. This is 2c higher than Wesfarmers’ allcash offer of $1.55.

API revived merger talks with Sigma in July soon after Wesfarmers made its initial bid of $1.38 a share, in an effort to generate more value.

Sigma talked up its offer on Monday, saying it would generate $45m in synergies a year, with API shareholders owning 48.8 per cent of the company.

“Sigma believes that the rationale for a combination of API and Sigma is highly compelling, with significant benefits accruing to both sets of shareholders, the industry and other stakeholders,” chairman Ray Gunston said.

He said a merged entity – which would combine Australia’s No.1 and No.2 pharmaceutical distributors – would create a “stronger platform to operate in a changing landscape”.

“The combined entity will benefit from Sigma’s best-inclass and modern distribution capability; and greater scale and balance sheet capacity.

“Sigma intends to fund the cash component of the proposal through new debt.”

While Wesfarmers chief executive Rob Scott has ruled out incorporating Priceline

Pharmacy stores in the company’s Bunnings, Kmart, Target and Officeworks stores, both API and Sigma are avid defenders of Australia’s community pharmacy laws, which stipulate that pharmacists must own pharmacies, not retail conglomerates.

It is this law that Sigma chief executive Mark Hooper said would be a challenge to Wesfarmers if its bid for API was successful.

“I’m sure they can bring some new … insights there, but it is a different model to what they’ve got for the rest of their businesses. These aren’t retail outlets they own, they are retail outlets that pharmacists own. So there will be some challenges on that front,” Mr Hooper said last week.

But Wesfarmers has entered the bidding with one key advantage: securing a deal with API’S biggest shareholder Washington H. Soul Pattinson to buy its 19.3 per cent stake in the company, subject to a superior offer.

Sigma shares jumped 1.7 per cent to 60c on Monday, while API was trading 3.1 per cent higher at $1.51 – below Wesfarmers’ offer price, which is an indication the market is betting more on the retail conglomerate.

API initially courted Sigma three years ago with a $727m takeover bid, which Mr Hooper firmly rejected, declaring he could deliver better value for shareholders by allowing him to pursue his growth strategy.

Sigma is now in a stronger position than when API first approached the company, having resumed paying dividends after swinging back into the black in March.

Vikesh Ramsunder will replace Mr Hooper as Sigma chief executive in February.