may reach the 3.50 target, page-2

Australian Pharmaceutical Distribution
API bid is strategic play with only upside for SIP or SYB.
n Calculated strategy to force industry decision
SIP's lowball bid for API is a strategic move forcing industry decision. Any transaction should have upside for
incumbant distributors, here's how: (1) a transaction at reasonable price would add value to acquirer, (2) acquisition
should spill secondary supply contracts of up to 10% market share to other competitor without any investment, (3)
the process should unsettle API recovery spilling market to SIP and SYB.
n Bid at $3ps makes deal EPS negative year one...
With divestment of API retail operations and realisation of synergies over time, we assume EBIT uplift for SIP or SYB
to be $76m and $62m respectively; this could support a bid c.$3.50ps for API (but leaves limited upside for
acquirer). However, in Year One with synergies of $15m offset by market share losses, a $3ps bid would make the
deal EPS negative - this is a constraint on bid price.
n We do not underestimate ACCC as a hurdle
On acquisition, either SIP and SYB should exceed 50% market share in each of the eastern States; the ACCC
blocked an API/SIP merger previously - the difference now is that 3 players have become 4 and the CSO provides
minimum service standards.
n We see only upside from the process for SIP or SYB
We expect a more competitive bid, and note that with Arrow revenue synergies, SIP is likely to be a position to offer
a higher bid than SYB or non-incumbant bidder.