At time of writing the Australian Pharmaceutical Industries Ltd [ASX:API] share price is up 8.16%, trading at $1.59 per share.
It’s been a volatile year for the stock:
Investors seem to like the latest news out of the company, as it moves to merge with a rival.
API share price reacts to proposed merger
API made an announcement today revealing that it had made a $700 million offer to Sigma’s board in October.
The terms of the merger include 0.31 API shares and 23 cents cash for every Sigma Healthcare Ltd [ASX:SIG] share.
This amounts to 68.6 cents of value for each Sigma share and a 69% premium of yesterday’s price of 40.5 cents.
Shares of Sigma have shot up a whopping 48.15% at time of writing, currently trading at 60 cents apiece.
Sigma’s share price has been struggling since it was announced in July that they were no longer the preferred wholesaler for Chemist Warehouse.
Citing efficiencies of scale, API chairman Mark Smith said that the merger could deliver $60 million in gross savings:
‘The real benefits of the proposed merger come from infrastructure and back office cost savings.’
Previously in the year, API acquired Clearskincare and has improved its return on equity over the past three financial years by 6.1%.
Despite difficult trading conditions and changes to the Prescription Benefit Scheme, the company is looking to grow further.
What’s next for API and Sigma?
The Australian Competition and Consumer Commission (ACCC) blocked a merger of API and Sigma in 2002 on the grounds that it would ‘harm competition’.
So assuming it passes this hurdle, API will look to complete the merger pending analysis by Accenture which is due to be handed down to Sigma.
While investing in pharmacies is not a source of massive growth, it does offer a measure of exposure to the retail sector without some of the risks that come with the territory.
After all, people will not stop going to pharmacies in the near future and to a degree, these stores have a ‘captive audience’.
So people looking to invest in this sector often look at the dividends available.
API offers a dividend in the 5% range, which is alright if you are willing to deal with some share price volatility.
Looking forward, the ACCC could intervene like it did in 2002, further adding to volatility.
For Money Morning