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Chemist Warehouse to list on the ASX via Sigma (ASX:SIG) shares

The Sigma Healthcare Ltd (ASX: SIG) share price is in the spotlight amid a plan to merge with Chemist Warehouse.

Chemist Warehouse is the largest pharmacy business in Australia, while Sigma is a wholesale and distribution business and also owns Amcal.

Pharmacy merger

Sigma and Chemist Warehouse are planning to merge to become the country’s leading healthcare wholesaler, distributor and retail pharmacy franchisor.

Chemist Warehouse is already the leading Australian retail pharmacy franchisor which has a multinational retail network of around 600 stores.

How will the merger work?

Under this deal, Sigma will buy 100% of the issued shares of Chemist Warehouse Group (CWG).

CWG shareholders will receive, in total, $700 million of cash (subject to any ‘leakage adjustment’) and the rest of the payment for CWG will be a number of Sigma shares until CWG shareholders own 85.75% of the merged business. Sigma shareholders will hold 14.25% of the merged group.

Sigma has received a credit-approved commitment letter from two banks for a new $1 billion debt facility to fund the cash part of the deal and to refinance existing CWG debt.

Benefits

Sigma said one of the benefits of the proposed merger is that it has the potential to unlock significant efficiencies, with cost synergies initially estimated at around $60 million per year, which is expected to be achieved four years after the merger is completed.

The combined business will have “greater scale, intestor interest and balance sheet strength”. It will have a potential market capitalisation of at least $8.8 billion and is expected to enter the ASX 200 (ASX: XJO).

In FY23, these two businesses generated a combined EBIT (EBIT explained) of at least $495 million, which doesn’t take into account the potential synergies above.

Capital raising

Sigma is going to do a fully underwritten pro-rata accelerated non-renounceable capital raising to fund the increased working capital requirement to implement the new Chemist Warehouse supply contract starting on 1 July 2024 and “progress business growth initiatives.”

Leadership commentary

The Sigma Chairman Michael Sammells said:

The proposed merger is a step-change event for Sigma. With Sigma having had a commercial relationship with CWG and its founders spanning more than 40 years, we are excited by the efficiencies, synergies and growth opportunities that we anticipate being unlocked through the merger of the two complementary businesses. The combined group will have extensive capabilities and expertise to benefit franchisees and customers, including through more brand choice, products and services and expanded marketing capabilities.

The CWG Chairman Jack Gance said:

The combination of CWG’s retailing and marketing capabilities and Sigma’s state-of-the-art distribution infrastructure and logistics capabilities presents a unique opportunity for both CWG and Sigma shareholders. We look forward to building the next chapter of CWG’s success for the benefit of our customers, staff, franchisees and shareholders.

Final thoughts on the Chemist Warehouse and Sigma merger

This is a highly unusual move and an incredible way to get Chemist Warehouse onto the ASX.

Sigma’s directors think this will create a lot of value for Sigma shareholders and are recommending the deal.

The ASX will have an industry powerhouse if it happens. It’ll be interesting to see what the ACCC has to say about this. Sigma said investors should take the uncertainty of the deal going ahead into account before deciding whether to buy Sigma shares or not.

If I were a Sigma shareholder, I’d be happy for the deal to go ahead, but I’m wary of what the ACCC will say. ANZ Group Holdings Ltd (ASX: ANZ) is struggling to buy the banking operations of Suncorp Group Ltd (ASX: SUN).

It’ll be fascinating to see how this plays out.

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