The $8.8bn Chemist Warehouse Sigma merger is finally going ahead with the ACCC not killing it off

Nearly a year since the $8.8bn Chemist Warehouse Sigma merger was unveiled, it seems we finally got a definitive answer as to whether or not it will go ahead. The ACCC investigated the deal and there was the risk of it blocking the deal if it reckons it will lessen competition. After all, it raised interim concerns. However, the competition regulator has given its blessing.

The finer details of the Chemist Warehouse Sigma merger

You probably know who Chemist Warehouse is – Australia’s biggest pharmacy chain. It also owns MyChemist, Ultra Beauty, My Beauty Spot and Optometrist Warehouse. One thing different about Chemist Warehouse from other pharmacies is it makes 70% of its money from front-of-shop items like sunscreen, toothbrushes and make-up – essentially things you could get in Coles of Woolworths too. The average community pharmacy generates more money from prescriptions.

Sigma Healthcare is Australia’s leading Pharmacy network with a wholesale and distribution chain that delivers to pharmacies, particularly those operating as franchisees such as Amcal +, Discount Drug Stores, PharmaSave and Guardian.

Chemist Warehouse had long wanted to list on the ASX, with aspirations of creating a behemoth like Walgreens in the US. Nonetheless, with equity capital markets enduring a difficult couple of years, the company’s executives thought it easier to list via merging with Sigma which was already listed. The proposed deal is not quite a merger of equals, as Chemist Warehouse would own over 85% of the new entity.

The concerns over the deal

The ACCC released a preliminary assessment of the deal back in June, raising concerns that it would reduce competition and result in consumers paying higher prices.

“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” ACCC Commissioner Stephen Ridgeway said.

“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level. We want to hear from interested parties, including rival pharmacies as we continue this review.”

“The transaction would create a merged company that is uniquely vertically integrated across multiple levels of the pharmacy supply chain. This new business model for the pharmacy sector could raise barriers to rivals expanding or entering, which may lessen competition,” Commissioner Stephen Ridgeway said.

“The ACCC has heard many concerns about the impact Chemist Warehouse has had on the pharmacy sector. However, the ACCC is focussed only on the impacts of the acquisition on competition, rather than the pros or cons of different business models. The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products.”

The deal got over the line

At the time, Chemist Warehouse and Sigma did what all companies in that situation would do. It released a statement saying it would try and overcome their concerns.

‘Chemist Warehouse Group is committed to fully co-operating with the ACCC and will continue to engage in the process to ensure the commission has all the information required to complete their assessment,’ a spokesperson for Chemist Warehouse told the ACCC.

Ah! So maybe the ACCC just didn’t do enough Googling, but never fear, Chemist Warehouse will see to it that the ACCC will be informed!

Well last week, on November 7, the ACCC advised it would not oppose the merger after accepting a court-enforceable undertaking. This undertaking would lessen competition concerns. Sigma offered contracted franchisees an exit path, and promised to ring-fence the data of its customers and franchisees from being accessed by Chemist Warehouse. So now, it is all systems go it seems.

There’ll be winners and losers

Supporting the deal is David Di Pilla’s HMC Capital as his fund is a substantial shareholder in Sigma. It owns nearly 20% of Sigma and will own just under 3% of the combined group. The billionaire Gance and Verrocchi families that founded and grown the company since the early 1970s would likely support the deal.

We’d imagine the ASX is keen too because the bourse has seen far more departures than new listings over the last 2 and a half years. A new $8.8bn company on the bourse would be a boost to morale at the exchange, and it might open the floodgates for 2025 to be a spectacular year for IPOs.

Among the opponents of the deal are competing pharmacies. John Cullity, the boss of Ebos which owns TerryWhite, shares the ACCC concerns that consumers will have less choice. Nonetheless, Ebos may benefit because Sigma has offered its chemists the chance to exit from the group – and they may switch to Ebos. The Pharmacy Guild has opposed the deal for the same reasons.

Conclusion

Now we know this deal is going ahead, and the strings will be attached. Shareholders will welcome the news, although competing pharmacists will not.

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