The Sigma Healthcare Ltd (ASX: SIG) share price has jumped 31% after the merger with Chemist Warehouse was approved.
Sigma-Chemist Warehouse merger approved
The ACCC announced that it does not oppose the merger between Sigma and Chemist Warehouse, on condition it follows through with a court-enforceable undertaking.
Why approve it? The Australian Competition & Consumer Commission made a few points.
The competition regulator said that it believes, with the undertaking, the proposed merger is “unlikely to substantially lessen competition”. It believes there will continue to be effective competition at all levels of the pharmacy supply chain, “capable of constraining a combined Sigma Chemist Warehouse”.
The ACCC came to this conclusion with the thought that other pharmacies and non-pharmacy retailers will “continue to compete to the same extent they compete now”.
Consumers will continue to have a choice between smaller format stores offering personalised services to consumers, and the Chemist Warehouse offering focused on larger format discount stores and front-of-store offerings.
The ACCC points to competing wholesalers such as EBOS Group Ltd (ASX: EBO) and Wesfarmers Ltd‘s (ASX: WES) Australian Pharmaceutical Industries, which can continue to distribute PBS medicines and supply retail pharmacy customers.
Retail pharmacies “do not face significant barriers to switching”, according to the ACCC.
Undertakings
Sigma will not enforce contractual restrictions on exit by retail pharmacies and ensures payments under contracts do not make it costly for a pharmacy to switch.
The enforceable undertaking also requires Sigma to safeguard and delete the data of those pharmacies that choose to switch. Sigma Chemist Warehouse must continue as a pharmaceutical wholesaler under the Commonwealth Government’s Community Service Obligation (CSO) arrangements for five years.
Management commentary
The Sigma CEO and Managing Director Vikesh Ramsunder said:
The ACCC decision marks a critical milestone for the proposed transaction and provides us with the conviction to progress with the next steps in the process.
The proposed transaction has the potential to create a leading ASX listed healthcare company through the combination of the complementary strengths of Sigma’s state-of-the-art pharmaceutical distribution infrastructure with Chemist Warehouse Group’s retailing know-how. We believe the proposed merger will create a stronger business and accelerate our long-term growth ambitions, for the benefit of our stakeholders.
Final thoughts on the Sigma share price
Sigma said it’s well-advanced in preparing the documentation shareholders require to vote on the proposed transaction, which must be reviewed by regulators before it can be sent to shareholders.
The regulatory review is expected to occur this calendar year. After the review is finished, Sigma will tell investors about the transaction timing.
It will be interesting to have the Chemist Warehouse business on the ASX, which has compelling growth plans.
