API said it will be reviewing its 13 per cent stake in Sigma, which it had acquired just prior to the offer being announced in October last year.
Sigma chief executive Mark Hooper said the decision has the support of the company’s major shareholders, but Allan Gray’s Simon Mawhinney warned the onus was now on the company to deliver.
He said Sigma had made a call and assessed that rejecting the deal was in the best long-term interest of investors – “and that’s fine, but they need to live and die by that decision.”
Allan Gray played a critical role in API’s offer when it sold an 8 per cent stake in Sigma to API ahead of its bid, and signalled its support for the proposed merger.
“We have previously stated that we are supportive of consolidation in the pharmaceutical wholesaling sector and are positively disposed to efforts to expedite its consolidation,” the fund manager said in a prepared statement when the proposal was announced in October.
API acquired 84.76 million shares from Allan Gray at 64¢ each. Sigma shares slumped 14 per cent in heavy trading on Wednesday.
The Sigma board cited a number of factors for its decision, including the outcome of the company’s strategic review last month and the fall in the value of API’s offer since it was announced last October.
The deal was worth $726 million at the time, but the fall in the suitor’s share price means the offer, which was to be financed with cash and API shares, was now worth less than $700 million.
Based on current market capitalisations, the deal would have created a $1.3 billion industry giant.
There was also the prospect of the deal being rejected by the competition regulator due to Sigma and API’s marketshare in the pharmaceutical wholesale sector.
Sigma has identified $100 million in annual cost savings after completing a four-month strategic review mapping out the company’s future after the lucrative Chemist Warehouse contract ends this year. The cost savings will let underlying earnings recover to 2019 levels by the 2023 financial year, it said.
The loss of the Chemist Warehouse contract will free up around $300 million in cash for acquisitions to “invest in income streams that build off the same infrastructure,” Mr Hooper said last month.
On Wednesday, Mr Hooper said Sigma understands the logic around the consolidation argument for merging its operations with API, but “ultimately this comes down to value”.
He said the board was aware that after knocking back API, the company will now have to deliver on its standalone plan: “We’ve got no problem with that.”
Sigma reports its full-year results next week.
Colin Kruger is a business reporter. He joined the Sydney Morning Herald in 1999 as its technology editor. Other roles have included the Herald’s deputy business editor and online business editor.