Shares in Australian Pharmaceutical Industries (API) have jumped over 10% in morning trade following Friday’s announcement that Sigma Pharmaceutical (SIP) is bidding for the beleaguered pharmaceutical wholesaler. SIP announced a bid of $2.20 per share for API, but today’s price action suggests the market is anticipating another bid at a higher level. Macquarie Research Equities (MRE) said that expect further bidding to continue, with the key question remaining how much one would pay….
The main question at this point is whether or not it will be approved by the ACCC. In 2002 when SIP and API attempted to merge, the ACCC blocked it with concerns about the quality of services to pharmacies and ultimately the consumers. Key differences this time around include:
(1) The fact that DHL has entered into the space and is eligible to receive funding from the CSO means that it is still a competitive marketplace and that the barriers to entry are sufficiently low. Additionally, in terms of market share, a combined API and SIP would unlikely maintain the combined market shares of the two separate players. In reality, pharmacists prefer to keep two separately owned accounts open on the table to ensure back up supply and to play off suppliers for rebates and other benefits. So instead of a combined 60% market share for the combined entity, it would more realistically be at the 45%-50% level. This is supportive of any merger going through in MRE’s view. (2) The CSO, which came into effect in July of this year, ensures that unprofitable customers continue to be serviced by the national wholesalers which is supportive of any customer service related issues that have arisen in the past and which ultimately blocked the merger in 2002. (3) Previously the industry argued that a merger in the space would work to improve the inefficient cost structure of the industry and get rid of duplicated services and logistics. However, this is somewhat counter-intuitive to the first point. With DHL's entry, an argument can be made that the industry is not as inefficient as once thought and that further consolidation is therefore not warranted.
Even with the third point, MRE see less ACCC issues this time around. As such, MRE expect to see further bidding to continue and likely to come from Symbion (SYB). The key question then becomes how much one would pay. In view of potential merger synergies and the sale of the retail pharmacy business, it is feasible that it could be a lot higher than SIP's current $2.20 per share bid.
API Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
