Australian Pharmaceutical Industries wants to merge with rival Sigma Healthcare

Australian Pharmaceutical Industries Ltd (ASX:API) wants to merge with rival Sigma Healthcare Ltd (ASX:SIG). Should you invest in either company?

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The Sigma Healthcare Ltd (ASX: SIG) share price has been placed in a trading halt this morning after rival Australian Pharmaceutical Industries Ltd (ASX: API) announced that it has acquired a 12.95% stake in the company and made a merger proposal.

According to the release, Australian Pharmaceutical Industries has made an offer to merge the companies with a cooperative approach so that Sigma shareholders will receive the equivalent of 68.6 cents for every share they own.

This offer comprises 23 cents per share in cash and 0.31 Australian Pharmaceutical Industries for every Sigma share. Sigma's shares last closed at 40.5 cents, meaning this offer equates to a premium of 69%.

If the offer were to be accepted and completed successfully, Australian Pharmaceutical Industries shareholders would own approximately 63% of the combined entity, with Sigma shareholders owning the remaining 37%.

Why is Australian Pharmaceutical Industries interested in merging?

Australian Pharmaceutical Industries' chairman, Mark Smith, explained that its board believes the merger will deliver significant benefits to both groups of shareholders, pharmacists, and customers.

He said: "A combined entity would create greater efficiencies in the wholesaling business to the ongoing benefit of all shareholders. This, in turn, would enable the combined business to provide greater assistance to pharmacists as they respond to current regulatory impacts and increasing retail competition, enabling a stronger, viable community pharmacy industry."

He also believes that its scale and volume would create a stronger business model in the future and expects meaningful synergies.

The release explains that Australian Pharmaceutical Industries estimates that the acquisition will deliver annualised pro-forma gross cost savings from pharmacy distribution and corporate functions of $60 million by year three of the merger. It is also expected to be immediately accretive to earnings per share.

Should you buy Australian Pharmaceutical Industries shares?

I think that this is a great idea by Australian Pharmaceutical Industries and believe the merged entity would be an attractive investment option. However, I think it's a touch soon to invest and would suggest investors wait to see how things develop in the coming days.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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