A merger between API and Sigma faces several hurdles.

The informal bid is subject to several conditions and would require ACCC approval; the bidder has requested permission to conduct due diligence and the market is telling us that the price is way too low.

A merger between Sigma and API stumbled at the ACCC hurdle in 2002. At the time, there was only one other wholesaler supplying pharmacies and concerns were expressed about a possible fall off in service to pharmacies and, ultimately, consumers. DHL Exel has now entered the market. Although not dominant, it is a fourth player and more importantly, its arrival demonstrates that the barriers to entry are not formidable and new players can enter the sector.

If the current market shares of API and Sigma were maintained, they would hold almost two thirds of the sector, dwarfing the other wholesalers. But pharmacists have traditionally operated more than one wholesale account, enabling them to keep a back up supply option open and provide the opportunity to play suppliers off to get the best deals. Thus a merged wholesaler would inevitably lose some share, possibly falling to between 50 and 60%. The concerns expressed when the ACCC knocked back a merger in 2002 now appear to have largely evaporated.

API has a recently troubled history. The introduction of a new computer system resulted in $17m going missing. It just vanished. The company spent $4.5m trying to find it, but couldn’t. The CEO departed, under cover of a confidentiality agreement, keeping shareholders in the dark. Next to go was the CFO. The market appeared to lose faith, trading it down to $1.63. We can only wonder what the largest shareholder, Washington H Soul Pattinson (21%), was thinking. So when a well managed outfit like Sigma comes along, it would be a brave board that sent them away.

The current bid is for Sigma to take over API at around $2.20 a share. It’s not enough, and the market clearly agrees, trading the stock up to $2.70.

This bid appears unlikely to be blocked by the ACCC or the API board. The key player is the major shareholder. Win the support of Washington H Soul Pattinson – a company that long ago ceased to be known as a chain of chemists and now describes itself as an investment house – and it would appear to be a done deal.

Few in the industry will be surprised if we hear of a rival bid in the next few days. Will it be from rival Symbion, Woolworths or Coles?

We are waiting to hear who’s writing the cheque, and for how much. Then we’ll see what happens to API.

Peter Fray

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