Chemist Warehouse engineers $8.8b reverse takeover of Sigma Healthcare

Australia’s dominant pharmacy chain Chemist Warehouse Group is poised for a reverse takeover of Sigma Healthcare (ASX: SIG) through an $8.8 billion merger that effectively opens up public investment for the first time in the fast-growing retailer.

After merger negotiations were finalised late last week, Sigma today announced that CW Group Holdings shareholders will secure an 85.75 per cent interest in the merged entity which will bring the Chemist Warehouse and Amcal chemist chains under the same banner.

CW Group (CWG) comprises about 600 Chemist Warehouse stores, largely in Australia and New Zealand, while Sigma Group, a key supplier of pharmaceutical products to the chain, also operates about 1,000 Amcal, Discount Drug Stores and Guardian Pharmacy stores.

The ‘transformational’ merger will be subject to scrutiny by the Australian Consumer and Competition Commission, and potentially New Zealand’s Overseas Investment Office approvals, as well as CW Group shareholders.

The merger has already hit opposition from the Pharmacy Guild of Australia which has voiced concerns over complex business models that it says put ‘profit over patient care’.

“Regulators must be wary of increased corporatisation in the community pharmacy sector, and carefully scrutinise complex business models for compliance with community pharmacy ownership laws – laws designed to ensure that only pharmacists own, operate and control community pharmacies (that) are in the best interest of patients,” says a spokesperson from the Guild.

In tandem with the merger deal, Sigma is raising $400 million through an entitlement offer to provide working capital for the group to meet its obligations under a supply agreement signed with Chemist Warehouse on 31 August 2023.

Under the terms of the merger agreement, Sigma will acquire 100 per cent of the issued shares in CWG through a $700 million cash payment and the issue of Sigma shares that will equate to 85.75 per cent of the merged group.

Sigma is meeting the cash component of the deal through a new $1 billion debt facility from ANZ Bank (ASX: ANZ) and National Australia Bank (ASX: NAB).

“The proposed merger is a step-change event for Sigma,” says Sigma chairman Michael Sammells.

“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 merged group is expected to deliver annual earnings before interest and tax of more than $495 million, before synergies, which are expected to initially total about $60 million.

The companies say the merger will create a full-service wholesaler, distributor and retail pharmacy franchisor that combines Sigma’s extensive distribution infrastructure with Chemist Warehouse’s retailing know-how.

“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,” says CWG chairman and co-founder Jack Gance, a pharmacist by profession who established his first pharmacy in 1972.

“We look forward to building the next chapter of CWG’s success for the benefit of our customers, staff, franchisees and shareholders.”

Should the merger succeed, Sammells will be independent chairman of the merged entity and Sigma’s current CEO Vikesh Ramsunder will continue to lead the group.

Gance and fellow CWG co-founder and CEO Mario Verrocchi will take executive positions on the board. Verrocchi will continue to manage the Chemist Warehouse business following the merger.

Other CWG appointments to the board include CWG’s chief commercial officer Damien Gance and chief people officer and Chemist Warehouse franchisee Danielle Di Pilla.

Chemist Warehouse was official founded in 2000 by Jack Gance, a pharmacist, and business partner Verrocchi, although the origins of the business in its existing form can be traced back to 1993.

The company, which is said to have about 50 per cent of market share in Australia, expanded into New Zealand in 2017 and has since taken its concept to Ireland and China.

Chemist Warehouse operates a franchise model with many franchisees owning multiple stores in the tightly held business.