THE wholesale prescription drug distribution market has long been ripe for rationalisation.
The trouble is the agitator for change is a company called Sigma, which has a fierce reputation as a cost-conscious operator; it is chasing a target called Australian Pharmaceutical Industries, whose value is difficult to determine; and it is dealing with a competition regulator, the ACCC, that has form on resisting much more consolidation.
However it seems that as of last night, Sigma's chairman, John Stocker, sent a letter to his API counterpart, Peter Robinson, testing the waters on an offer for $2.50 per share usurping a previous offer proposal of $2.20 per share.
It's better than the first attempt, but it could still fall short of the target's expectations.
But in many senses it won't be the board of API that makes the decision about ultimate ownership. This will come down to the company's 22 per cent shareholder, a very tough operator called Robert Millner at Washington H Soul Pattinson, and the competition regulator.
No deal gets done on the consolidation of the wholesale drug sector without Soul Pattinson's Millner giving the green light.
Its pretty clear that $2.20 didn't meet his expectations. Nor would it have met the expectations of a number of funds that have bought into API over the past couple weeks at between $2.50 to $2.70.
Those spreading the gossip around the market yesterday had $2.70 as the expected price of Sigma's second round bid. So there will be plenty of disappointed punters around today.
Sigma timed its bid for API because the target's management has rendered the company vulnerable, having inexplicably lost around $17 million in a head-scratching accounting/IT glitch that no investor understands. (Indeed it is questionable that anyone inside the company really understands or is prepared to explain it.)
Investor faith in management and its accounts hit an all-time low a few months back and the predators began circling. Who could blame them?
The management inside Sigma know the API business. They know how much it makes and the potential for $150 million in synergies that would come about from merging the operations.
Sigma management wants API to deal but it first wants API to lift its skirts. And it easy to see why, thanks to the fact that the $17 million that API wrote off a few months ago has still not been found. It puts a whole new light on the concept of opening the books.
API Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
