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The owner of such pharmacy retail brands as Amcal, Discount Drug Stores and Guardian will hand over a substantial shareholding to privately-owned competitor Chemist Warehouse in exchange for a new supply contract that is expected to generate $3 billion in sales in its first year of operation.
Sigma Healthcare (ASX: SIG) has signed a binding term sheet with Chemist Warehouse to supply Pharmaceutical Benefits Scheme (PBS) medicines and fast-moving consumer goods (FMCG) to Chemist Warehouse under a five-year contract starting on 1 July, 2024.
The deal represents a renewal of its FMCG contract which already represents 29 per cent of Sigma's net sales revenue, but the PBS contract represents a new development.
As part of the terms, Chemist Warehouse will be issued shares in Sigma at the start of the supply contract representing approximately 10.7 per cent of shares on issue post issuance. These shares will be issued with a value of 64.2cps - a marginal premium to yesterday's price at the close of trade but a discount to the 72cps level seen in early April.
Chemist Warehouse will also have the right to acquire certain non-core assets from Sigma with a value of $24.5 million, although if it decides not to do so it will simply receive the same amount in cash from Sigma.
"The decision by Chemist Warehouse to award Sigma this supply contract is wonderful news for our company and our shareholders," says Sigma Healthcare CEO Vikesh Ramsunder.
"The contract allows us to leverage our highly automated distribution centres and latent spare capacity after multiple years of investment. We thank Chemist Warehouse for their confidence in our service capability and awarding of the contract.
"Sigma has worked tirelessly the past 12 months to build a stronger company and to significantly improve our operational performance for the benefit of all customers. Securing this Chemist Warehouse contract means we will now have real scale and momentum moving into the future."
Once fully implemented the terms of the supply contract are anticipated to support Sigma’s medium-term EBIT margin guidance of 1.5 per cent to 2.5 per cent.
While SIG shares surged 21.6 per cent following the news to 77.2cps, shares in New Zealand-headquartered company EBOS Group (ASX: EBO) dropped 14.3 per cent after it was advised by Chemist Warehouse intended to "pursue alternative wholesale supply arrangements for its Australian stores".
The implication is that the EBOS Group contract with Chemist Warehouse, which currently generates approximately $1.9 billion in revenue annually, will not be renewed beyond its expiry date of 30 June, 2024.
"We have always recognised that the contract renewal was a risk to our business and therefore we have been developing strategies to minimise the earnings impact from this potential outcome and create alternative opportunities for growth," EBOS chief executive officer John Cullity said.
"We are confident in the growth strategies we have for both our healthcare and animal care sectors and in the overall diversity of the group’s earnings."
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