Australian Pharmaceutical Releases Market Update on API-Sigma Merger Proposal

Australian Pharmaceutical Industries Limited (ASX: API) has acknowledged the announcement made by Sigma Healthcare rejecting merger proposal on a non-binding indicative offer made by API. The offer was valued at a premium of 41.8% over the undisturbed volume weighted average (UVWA) price of Sigma shares trading one month before the offer date on December 14, 2019. The scheme of arrangement comprised as for $0.23 in cash plus 0.31 API shares for each Sigma share.

It was expected that by the third year of the merger, the combined entity would have realized around $60 Mn per annum in synergy. However, in contrast to the assumption above, the business itself will be significantly downsized which is supported by the decision of Sigma’s major customer Chemist Warehouse to take its business elsewhere. As per Sigma’s guidance, $100 Mn cost savings will be offset by lost Chemist Warehouse revenue.

Sigma released its update on API proposal today. In the release statement, Sigma stated that it has plans to restructure its significantly downsized business in order to benefit its consumers, pharmacists, and shareholders, and hence does not want to pursue any merger activity as of now. For this Sigma has completed and validated a significant business transformation review and it is expected that benefits from the program will see Sigma’s FY2023 EBITDA return to a similar level as in FY2019 with the reduction in debt and upside opportunities from future acquisitions.

In conclusion, Sigma Chairman Brian Jamieson stated that the board on assessing the future potential for Sigma on a Standalone basis finds API proposal not reflecting the long term prospects for its growth, and therefore not in the best of interest for its shareholders. Post the expiration of the MyChemist/Chemist Warehouse (MC/CW) contract, the release of $300 million working capital is expected and will be deployed into future growth opportunities for Sigma.

Since API’s proposal on October 11, 2018, API’s share price has declined more than 15%. Moreover, the returns to Sigma shareholders under the proposal, would have required ACCC approval and later on depended on the successful integration of the two businesses.

In a previous update, API reported revenue at $4 Bn, underlying EPS at 11.1 cents, underlying NPAT at $54.7 Mn and underlying EBITDA at $119 Mn for FY2018. Its final dividend payment was up by 14.3% taking the total dividend to 7.5 cps for FY2018. The company completed Stage 1 of Clearskincare acquisition.

In H2FY18, API’s total network sales’ were up by 2.1% to $2.11 Bn. Its total registered sales excluding dispensary increased by 0.4% to $1.158 Bn. It reported retail network at 475 stores as on August 31, 2018.

On stock information, Australian Pharmaceutical’s share last traded at $1.395 up 3.333% (As on March 14, 2019) with the market capitalization of ~$664.92 Mn. Its current PE multiple is at 13.78x, and its last noted EPS was at 0.098 AUD. Its 52 weeks high has been noted at $1.945 and 52 weeks low at $1.227. Its absolute return for 5 years, 1 year, and 3 months are 136.84%, -13.74%, and -8.16% respectively.


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