In morning trade the Australian Pharmaceutical Industries Ltd (ASX: API) share price and the Sigma Healthcare Ltd (ASX: SIG) share price have dropped lower after the latter provided an update on a merger proposal.
What happened?
This morning Sigma provided an update on the non-binding indicative proposal from Australian Pharmaceuticals Industries that it received in December.
The proposal would see Australian Pharmaceuticals Industries acquire all Sigma shares via a scheme of arrangement for 0.31 API shares plus 23 cents in cash for each Sigma share held.
The two parties have engaged in a limited form of due diligence over the last couple of months. This has focused on the synergy and regulatory workstreams and included the mutual sharing of high-level information through virtual data rooms and in-person due diligence sessions.
According to the release, the due diligence has confirmed that there is a sound basis for the $60 million per annum run-rate synergies assumption by the third year following the merger. A large portion of these synergies are expected to come from consolidating the supply chain to Sigma-owned warehouses. Significant further work is required on the regulatory workstream.
At the same time as conducting the due diligence, Sigma has been working on a standalone business review of its own. This was completed in February and identified cost efficiencies of over $100 million that are deliverable by Sigma as a standalone business over the next 18-24 months. These savings are separate to the $60 million of synergies identified in the due diligence process.
Management advised that this business transformation review identified that benefits from the program will see Sigma's FY 2023 EBITDA return to a similar level as FY 2019. Furthermore, the business is expected to have a strong balance sheet with minimal debt and upside opportunities from acquisitions.
In light of this, the Sigma board has now completed a detailed assessment of the proposal and concluded that it is not in the best interests of shareholders.
Sigma chairman, Brian Jamieson, said: "The Board is confident that after thoroughly assessing the outlook of Sigma on a standalone basis, the current API proposal does not reflect the long-term prospects and value inherent in Sigma having regard to the reset cost base of the business and our own growth agenda. Therefore, after considering the API Proposal in detail, we believe it is not in the best interests of our shareholders."
What now?
I don't believe this is the end of the matter and suspect that Australian Pharmaceutical Industries may return with a better offer that reflects the benefits that have been identified in the business transformation review.
However, I wouldn't invest purely in the hope of a better offer. I would suggest investors keep their powder dry for now and wait to see how the situation unfolds over the coming months.
In the meantime, I would sooner buy healthcare shares such as Cochlear Limited (ASX: COH) or CSL Limited (ASX: CSL).
