The Sigma Healthcare Ltd (ASX: SIG) share price has jumped 36% after returning to the ASX.
As a reminder, Sigma is in the process of ‘acquiring’ Chemist Warehouse. A lot of new Sigma shares are going to be issued to existing Chemist Warehouse shareholders who will end up owning a large majority of the business.
Why is the Sigma share price rising?
You’d have to ask each investor why they’re willing to pay so much more than a couple of weeks ago.
Sigma said the proposed merger has the potential to unlock “significant efficiencies”, with cost synergies initially estimated at around $60 million per year” which is expected to be realised four years after completion.
The combined business could have a market capitalisation of around $9 billion and it’s expected to be within the ASX 200 (ASX: XJO).
Sigma said this will create a “full-service wholesaler, distributor and retail pharmacy franchisor.” It’ll combine “extensive and state-of-the-art distribution infrastructure with Chemist Warehouse Group’s leading retailing know-how.”
The combined business will have a “larger and more diversified earnings base” with a total EBIT (EBIT explained) last financial year of more than $495 million. That means a lot more profit for the Sigma business, which could help the Sigma share price.
Sigma also pointed out the balance sheet will have greater strength as well.
Board comments
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.
Final thoughts on the Sigma share price
I can understand why investors are excited by the existing Sigma shares because the business could be much stronger, even after splitting it between a lot more shares.
It’ll be interesting to see how much of a presence Chemist Warehouse will have on the ASX if it makes it – the ACCC may decide to block the transaction.
