Australian Pharmaceutical Industries Ltd (ASX: API) shares will be a focal point for the market today following its decision to propose a merger with Sigma Healthcare Ltd (ASX: SIG).

Who is API?

API Pharmaceutical is the pharmacy company behind Priceline, ClearSkincare, Soul Pattinson Chemist and much more. The Melbourne-based company is more than 100 years old and operates more than 500 chemists and hundreds more are included in its member network.

What’s Going On With Sigma?

Sigma Pharmaceuticals is a pharmacy distribution business and the name behind Amcal, Chemist King, Discount Drug Stores, Guardian and PharmaSave.

Naturally, the two businesses are very complementary. While both businesses are facing intense pressure from rivals like Chemist Warehouse and online, Sigma shares been whacked over the past three years. Notably, they lost the deal to supply Chemist Warehouse.

Sigma is worth $430 million based on yesterday’s prices while API was worth $724 million.

Under the terms of today’s proposed merger, API will offer 0.31 shares plus $0.23 in cash per share to merge with Sigma. That’s a 46% premium to the one-month average price of Sigma shares.

“A combined entity would create greater efficiencies in the wholesaling business to the ongoing benefit of all shareholders,” API 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.”

In addition to growing competition, both companies are facing pushback on the regulatory front, from the Government who is hoping to keep a lid on drug prices and funding.

Under the deal, both Sigma and API would keep their outward facing brands but combining their distribution and head office costs would save about $60 million by year three, according to API.

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

Is it time to buy or sell?

The deal sounds great on paper for concerned Sigma shareholders. If you ask me, although it may be ‘opportunistic’ by API to offer the deal after Sigma’s share price has been sold down, it may indeed be a good time for shareholders who are concerned about the business’s outlook to sell.

Looking at the deal itself, I imagine this “non-binding” offer will attract significant attention from the competition regulator, the ACCC. Also, API needs to conduct their due diligence and confirm the expected cost savings. To me, that’s kind of like saying, ‘we’ll buy your shares, but only if you can confirm they’re worth what we think they’re worth.’

Therefore, I personally wouldn’t be prepared to bank on the proposed deal being a success. Although if it indeed goes ahead the combined business would be on the front foot to deal with some of the headwinds plaguing the wholesale and retail pharmacy sector.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).