The Sigma Healthcare Ltd (ASX: SIG) share price is down 7% as the market digests the ACCC’s concerns about the Chemist Warehouse merger.
In December 2023, Sigma Healthcare announced it was planning to merge with Chemist Warehouse.
ACCC shares Chemist Warehouse concerns
The Australian Competition and Consumer Commission (ACCC) noted this proposal is a “major structural change” for the pharmacy sector, involving the largest pharmacy chain by revenue merger with a key wholesaler to thousands of independent pharmacies that compete against Chemist Warehouse.
The ACCC said it had identified a “range of preliminary competition concerns, including at the retail level”.
Australia’s competition regulator now wants to hear from interested parties, including rival pharmacies, as it continues this review.
The ACCC emphasised it’s focused on whether this deal would impact competition. It’s also concerned that the merger may harm pharmacies currently supplied by Sigma, leading to a “substantial lessening of competition in pharmacy retail”.
A company that’s vertically-integrated across multiple levels of the pharmacy supply chain could “raise barriers to rivals expanding or entering, which may lessen competition”.
Currently, the ACCC says, Sigma is incentivised to maximise wholesale sales. But after the proposed transaction, the newly merged business “may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive.”
Another concern for the ACCC is that Chemist Warehouse may access and use commercially sensitive data relating to pharmacies supplied by Sigma, harming competition.
ACCC Commissioner Stephen Ridgeway said:
This lessening of competition may lead to reduced service quality for goods and services provided in pharmacies as well as higher prices for consumers. The transaction may also weaken the competitiveness of the different product and services offered by Sigma’s banner pharmacies.
Sigma response
Sigma said in an ASX announcement that the issues identified by the ACCC are not “unexpected for a proposed transaction of this complexity” and noted the views are “preliminary” on “potential issues”,
Chemist Warehouse and Sigma think there are “good arguments” why the proposed merger won’t lessen competition, though didn’t outline them.
The ACCC expects to make a final decision on 5 September 2024, though the timeline can change.
Final thoughts on the Chemist Warehouse merger
While it’s still possible the merger could go ahead, it seems like an uphill challenge with the number of different concerns from the ACCC, and how it has outlined the change could affect other pharmacies and consumers.
I wouldn’t buy Sigma shares right now expecting the deal to go ahead.
