The Wesfarmers (ASX:WES) share price rose after the API (ASX:API) bid

Wesfarmers shares increased after making a bid for API.

| More on:
Three excited business people cheer around a laptop in the office

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Wesfarmers Ltd (ASX: WES) share price increased yesterday after the business made a larger bid for Australian Pharmaceutical Industries Ltd (ASX: API).

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.

Motley Fool contributor Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on Share Market News

A young smiling couple out hiking enjoy a view from the top of the mountains.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors enjoyed a rosy end to the trading week this Friday.

Read more »

A fun depiction of summer Santa Claus -- wearing red swimming trunks and Hawaiian shirt -- sitting in a deck chair on his laptop at the beach.
Opinions

2 ASX stocks on my naughty list this Christmas

Nothing but coal in the stockings of these disappointing companies.

Read more »

Man raising both his arms in the air with a piggy bank on his lap, symbolising a record high.
Record Highs

The multi-billion-dollar ASX tech share hitting new highs on broker bullishness

This ASX tech share darling is up 216% in the year to date and just reset its record price.

Read more »

Cheerful businessman with a mining hat on the table sitting back with his arms behind his head while looking at his laptop's screen.
Resources Shares

Fortescue shares are galloping again as Twiggy stays confident in China's horsepower

It's business as usual for the miner despite Trump's promised 60% tariffs on Chinese imports.

Read more »

A graphic showing a businessman running up a white upwards rising arrow symbolising the soaring Magellan share price today
Share Gainers

How these 3 ASX 200 stocks led the charge higher this week

The three top ASX 200 stocks are up 14% to 34% this week.

Read more »

Businessman working and using Digital Tablet new business project finance investment at coffee cafe.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A man clenches his fists in excitement as gold coins fall from the sky.
Share Gainers

Why Imugene, Neuren, Sigma, and Smartgroup shares are charging higher

These shares are ending the week on a high. But why? Let's find out.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why Arcadium Lithium, Block, Jumbo, and Mineral Resources shares

These shares are ending the week in the red. Why are investors selling them?

Read more »