The week kicked off with Wesfarmers (ASX:WES) making a $687 million non-binding, indicative offer to acquire Australian Pharmaceutical Industries (ASX:API) at $1.38 per share by way of a scheme of arrangement.
API’s revenue of $4 billion covers a portfolio of pharmacy distribution ($3 billion or 75 per cent of total revenue) including the Priceline Pharmacy chain (474 – however it is important to note register sales made by franchisees do not form part of API’s results), as well as health and beauty retail including the Clear Skincare beauty network (67 account for $42 million of revenue).
Unlike its takeover for Coles Group, the timing of the WES bid appears sensible. API had just announced it will cease manufacturing over-the-counter personal care products in New Zealand (revenue of $67 million) at a cost of $25 million. In addition, the full year earnings guidance for the year to August 2021 – at the Underlying Earnings before Interest and Tax (EBIT) line – had been cut by 10 per cent to around $67 million. Due to various lockdowns, this coincided with the temporary closure of 72 per cent of the non-pharmacy company owned Priceline stores and 75 per cent of the Clear Skincare clinic network.
In an interesting twist, Washington H Soul Pattinson (ASX:SOL), (market capitalisation of $7.9 billion) – there are 43 Soul Pattinson stores under the API umbrella – has granted WES an option to acquire its 19.3 per cent shareholding in API.
The WES CEO, Rob “they’re not browsing” Scott, said the acquisition would provide WES the opportunity to enter the growing health, wellbeing and beauty sector and API would form the basis of this new division. Assuming WES are successful with their bid – and even if they had to pay-up to get the transaction completed (a rounding error for WES) – the first challenge will be to try and drive higher margins from the $3 billion pharmacy distribution division.
The second priority will be to make sensible bolt-on acquisitions to ensure this new division becomes somewhat relevant to WES over the medium-term. There are lots of businesses – both listed and unlisted – that will come into focus for Rob Scott and his team. Sigma Pharmaceuticals (ASX:SIG) (market capitalisation of $646 million), for example, reported EBIT of $63 million on revenue of $3.4 billion for the year to January 2021. And like API, its share price performance over recent years has been underwhelming.
The Montgomery Funds owns shares in Wesfarmers and Coles. This article was prepared 12 July 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.