A prospective backdoor listing and a marriage of convenience have enlivened end of financial year stock market prognostications.
The backdoor listing on the Australia Securities Exchange for Chemist Warehouse through a merger with Sigma Pharmaceuticals looks problematic.
The marriage of convenience through a Myer acquisition of Premier Investments apparel brands portfolio is more likely to succeed.
A merger with Sigma Pharmaceuticals remains the preferred option for restructuring Chemist Warehouse but if that plan is quashed by regulators or Sigma shareholders there is a plan B.
A straightforward initial public offering is a live option for Chemist Warehouse following extensive planning over six years.
The $8.8 billion merger proposal announced in December last year may offer some tax advantages but more importantly it unlocks operational benefits from a vertically integrated business model.
The two parties have already identified more than $60 million in synergy benefits but would anticipate higher gains given the operational scale of a merged entity.
However, the merger plan faces a likely regulatory hurdle after the Australian Competition and Consumer Commission has indicated a number of competition concerns.
Indeed the merger proposal faces a much more rigorous assessment than the Wesfarmers acquisition of Australian Pharmaceutical Industries in April 2022.
Wesfarmers was fortunate to finalise the API takeover before the change of Federal Government in May 2022 and, in any event, represented a new business channel for the Perth-based conglomerate rather than an expanded role in the sector.
That Wesfarmers acquisition in itself may be a factor in the ACCC competition assessment but, more significantly, the regulator is more hawkish and empowered following the recent inquiries into market dominance in the grocery sector.
While the Federal Government has not extended the penalty regime recommended by the Emerson Inquiry beyond Coles and Woolworths to Bunnings or Chemist Warehouse, they and other large businesses are effectively ‘on notice’ for misuse of market power.
The proposed merger of Chemist Warehouse and Sigma could create a “major structural change” for the pharmacy sector according to a preliminary report by the ACCC.
The attraction of a vertical integration business model to Chemist Warehouse is in red flag territory for the ACCC primarily because of the impact on wholesale competition, pricing and support services for Sigma banner groups and community pharmacies.
The ACCC is now considering further submissions in response to the issues it has identified with the proposal with a view to a decision on the merger by September 5th.
The ACCC will no doubt also have regard to the Federal Government as a major stakeholder in the retail pharmacy and pharmaceutical sectors through the pharmaceutical benefits scheme.
Chemist Warehouse will have responses to ACCC concerns including the competitive balance provided by Wesfarmers API and the expanding Priceline Pharmacy and Terry White Chemist chains.
It could also potentially offer to divest its My Chemist and or the My Beauty Spot chains to focus on its format warehouse stores which are estimated to generate around 70 percent of sales from retail merchandise.
That percentage is significantly higher than a conventional pharmacy and Chemist Warehouse argues sees their business more in competition with Coles and Woolworths than with pharmacies.
Assurances on the wholesale operations and support for other chains such as Sigma’s Amcal and community pharmacies will also be crucial elements of a Chemist Warehouse response to ACCC concerns.
There are two Woolworths precedents for a major chain also providing wholesale support to independent retailers, one in grocery and the other the Masters Home Improvement – Home Timber and Hardware banner.
However, both were short lived and less complex and less expansive than the Sigma customer base.
After some six years spent exploring and preparing for a stock market listing, Chemist Warehouse believes the Sigma backdoor listing is its best option and will not adversely impact on competition in the market.
The option of a straightforward IPO is a backup plan, an outcome that Sigma has also factored in with a capital raising from its shareholders to fund the logistics of a new supply contract with Chemist Warehouse effective from July 1st.
The Myer takeover of Premier Retail’s apparel brands seems certain to succeed as part of Solomon Lew’s restructure of his retail investments.
The Myer takeover of Premier Retail would require approval by shareholders and approvals from the Australian Competition and Consumer Commission, the Australian Securities and Investments Commission and the Australian Taxation Office.
However, there are no foreseeable regulatory hurdles for this takeover and the Myer acquisition of the Solomon Lew controlled Premier Retail brands is a more palatable outcome to Myer shareholders than a reverse manoeuvre.
Lew is Myer’s largest shareholder with a 31.7 per cent stake that would be reduced under the takeover plan.
Lew’s influence would remain with an expected board position, prospectively joining his Premier director Terry McCartney and friend Gary Weiss who are both currently directors of Myer.
Merging Myer and Premier Retail is a real win for Lew but it should also benefit other shareholders in both entities.
The potential merger of Lew’s retail interests after the decision to spin off the growth brands, Smiggle and Peter Alexander, into new listed entities cleans up his investments.
The problem with spinning off those two well performed retail chains was that it left Lew and Premier Retail’s less dynamic apparel brands stranded.
The Myer takeover fixes the problem while also removing uncertainty about the department store’s future ownership.
The acquisition of Just Jeans, Portmans, Jacqui E, Dotti and Jay Jays by Myer provides a new growth channel after several years of reducing department store floor space and trying to find a fashion edge.
Myer already has two specialty chains, sass & bide, Marcs and David Lawrence and the Premier brands will create a significant new division for the venerable department store chain.
There will no doubt be a view that Myer will be acquiring a portfolio of brands that have been inconsistent performers for a number of years, however, this deal provides scale and should extract significant synergy benefits.
Myer had been mulling over the divestment of its three specialty brands in recent months but the Premier brands will provide scale in a new division for Myer with benefits to loyalty programs and online platforms that could open international market opportunities.
The Premier brands could also provide the department stores with expanded merchandise range options.
Combining Myer and the Lew’s apparel brands also strengthens management after senior executive departures from the department store chain and the impending division of management as Smiggle and Peter Alexander are divested from Premier Retail.
If the takeover proceeds, it will lift Myer’s revenue to around $4 billion and provide the company’s new CEO Olivia Wirth with an opportunity to create a formidable fashion retail business.
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