Sigma's $5.9b merger with Australia's Chemist Warehouse raises regulatory concerns

Sigma's $5.9b merger with Australia's Chemist Warehouse raises regulatory concerns

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Australia’s competition regulator on Thursday flagged major concerns with Sigma Healthcare’s proposed merger with retailer Chemist Warehouse Group to form an A$8.8 billion ($5.9 billion) company.

The Australian Competition and Consumer Commission (ACCC) said in a statement the proposed integration across the wholesale and retail level would limit competition in several markets.

Chemist Warehouse is a privately-owned pharmacy and retail chain in Australia known for cheap prices, large stores and major advertising campaigns, while Sigma is a wholesaler and distributor of prescription medicines and other products.

Sigma shares were down 4.56% in afternoon trading after having dropped nearly 11% earlier on Thursday. A final ACCC decision is due on Sept 5.

Sigma said it would cooperate closely with the ACCC as part of the regulator’s competition review. It added the ACCC’s statement of issues was not unexpected for a complex transaction.

Chemist Warehouse said it would fully cooperate with the ACCC and would ensure the regulator had all of the information required to complete its assessment.

The proposed deal, announced in December, has Sigma acquiring Chemist Warehouse in exchange for a stake in the company and A$700 million in cash, allowing Chemist Warehouse to be effectively backdoor-listed through Sigma.

Chemist Warehouse will own 85.8% of the merged entity that will supply 1,000 Sigma-aligned pharmacies and own 600 Chemist Warehouse outlets.

The regulator said the deal could leave pharmacies outside of the merged group facing rising costs, which would lead them to be less competitive.

“The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products,” ACCC Commissioner Stephen Ridgeway said.

Shaw and Partners senior analyst Philip Pepe said the ACCC’s statement, combined with its decision to block some major deals like Qantas Airways’ proposed purchase of Alliance Aviation Services, increased the risks of the Sigma deal not going ahead.

“(This) leads us to continue to believe the proposed merger is unlikely to receive ACCC approval in its current form,” said Pepe, who downgraded Sigma to a “sell” rating in late March.

The ACCC said it was worried the merged group would have access to Sigma’s existing pharmacy customers’ commercially sensitive data.

“Following the acquisition, the merged company may be able to use insights from data obtained to target pharmacies that rival Chemist Warehouse or pre-empt and undermine them,” Ridgeway said.


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