Sigma Healthcare Ltd (ASX: SIG) shares are likely to trade sharply higher when its ASX shares return to active trading following the announcement of a proposed merger.
Sigma Pharmaceuticals is a pharmacy distribution business and the name behind Amcal, Chemist King, Discount Drug Stores, Guardian and PharmaSave. In 2018, Sigma announced it would lose its contract to supply Chemist Warehouse. However, it remains a multi-million dollar company with chemists dotted throughout the country.
Sigma To Join API?
In an announcement today, Australian Pharmaceutical Industries Ltd (ASX: API) announced a proposal to merge with Sigma. API is the $700 million owner and operator of pharmacy businesses Priceline and Soul Pattinson.
Under the terms of the deal, Sigma shareholders would receive $0.23 in cash plus 0.31 API shares for every share in Sigma they own.
API says the value of the offer represents a 69% ‘premium’ or improvement on Sigma’s share price yesterday. It’s 46% better than Sigma’s average share price over the past month.
“A combined entity would create greater efficiencies in the wholesaling business to the ongoing benefit of all shareholders,” API’s Chairman, Mark Smith said.
“This, in turn, would enable the combined business to provide greater assistance to pharmacists as they respond to current regulatory impacts and increasing retail competition, enabling a stronger, viable community pharmacy industry.”
Sigma is yet to respond to the announcement but API says the deal could save the companies a combined $60 million in head office and distribution costs by the third year of consolidation.
However, it’s also worth adding that the merger is subject to many conditions which, in my opinion, add a lot of uncertainty to the deal going ahead.
Time to buy?
In my opinion, both Sigma and API are facing strong headwinds in an already tough market. Funding pressures from the government and PBS are making things a little harder on the distribution side of their businesses as new competitors and the likes of Chemist Warehouse are challenging the retail side.
While an investment in either company offers a dividend, I struggle to get excited about the growth prospects of either API or Sigma. Therefore, I think it makes sense to look outside the Australian retail pharmaceutical industry to find healthcare shares that offer both long-term growth and big dividend potential. The 2 small-caps in the free report below offer that.
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