The Wesfarmers Ltd (ASX: WES) share price increased yesterday after the business made a larger bid for Australian Pharmaceutical Industries Ltd (ASX: API).
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How big was the Wesfarmers bid for API?
The new offer was a cash bid of $1.55 per share. This revised bid represents a 37% premium to API's one-month volume weighted average price of $1.133 per share to 9 July 2021, which was before the initial offer by Wesfarmers.
This bid allows for the payment of fully franked dividends up to a maximum of 5 cents per API share, including any final dividend declared for FY21. The cash consideration of $1.55 will be reduced by the cash component of any dividends.
What is API going to do?
The API board has stated it intends to unanimously recommend the revised proposal assuming the agreement proceeds, Wesfarmers completes confirmatory due diligence, no better proposals are received and an independent expert concludes this higher offer is in the best interests of API shareholders.
API's major shareholder Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) has agreed to vote its 19.3% shareholding in API in favour of Wesfarmers' revised proposal. Soul Patts has also granted a call option about its API shares in favour of Wesfarmers.
Management commentary
The Wesfarmers managing director Rob Scott explained the thought process behind the offer and why this was part of its strategy of investing capital in areas where it can leverage its capabilities to create long-term value:
Wesfarmers supports the community pharmacy model, including the pharmacy ownership and location rules. If the proposal is successful, we see opportunities to invest to strengthen the competitive position of API and its community pharmacy partners by expanding ranges, improving supply chain capabilities and enhancing the online experience for customers. API would also provide the basis of a new healthcare division of Wesfarmers and a platform from which to invest and develop capabilities in the growth health, wellbeing and beauty sector.
The size of the bid included the earnings impacts from the extension of COVID-19 related restrictions beyond the end of July 2021.
Continued diversification plays by Wesfarmers
The Wesfarmers share price and profit may currently be predominately influenced by businesses like Bunnings, Kmart Group and Officeworks, but it is continuing to make diversification moves which open up new earnings avenues for the company.
Wesfarmers says that API will be a founding part of a healthcare division, which may suggest that more moves are being considered.
Another non-retail play that Wesfarmers is doing is lithium. It has a stake in the lithium project called Mt Holland, together with Sociedad Quimica y Minera de Chile.
Earlier this year, Wesfarmers said that the concentrator and refinery production capacity would be approximately 50,000 tonnes per annum of battery grade lithium hydroxide. There is also the potential for a second phase of the project to expand production capacity at Mt Holland and the Kwinana refinery.
The first production of lithium is expected in the second half of 2024. The capital cost for the development of the project is estimated at approximately $950 million.
Wesfarmers share price valuation
Using the earnings estimate on Commsec, the Wesfarmers share price is valued at 27x FY23's estimated earnings.
