The board of Australian Pharmaceutical Industries (ASX: API) has knocked back a $680 million acquisition offer from Wesfarmers (ASX: WES), describing the timing as opportunistic given the impacts of COVID-19 on financial performance over the past 18 months.
The group has advised shareholders take no action, although substantial shareholder Washington H. Soul Pattinson (ASX: SOL) has backed the deal from the get-go.
The proposal was announced on the same day the company released a trading update clarifying 72 per cent of its non-pharmacy, company-owned Priceline stores had been temporarily closed in June and July due to lockdowns, along with 75 per cent of its Clear Skincare clinic network.
API explained at the time it had been on track to a full-year underlying earnings before interest and tax (EBIT) result of $75 million, but the lockdowns meant it was clear a revised forecast would be needed, pushing expectations down to the $66-68 million range.
However, API believes its 470 Priceline Pharmacy outlets have "substantial" medium-term earnings growth prospects with an attractive outlook for discretionary health and beauty spending as COVID restrictions unwind, in addition to a continued roll-out of franchise pharmacies.
The board also highlights margin improvement and strategic initiatives, including the recent closure of nine loss making company-owned Priceline stores in CBD locations as the network is recalibrated into suburban areas post-COVID.
Earnings are also expected to improve due to the savings that flow from the completion of API's new automated Marsden Park Distribution Centre in Greater Western Sydney by the end of FY22.
"The board notes that the indicative proposal implies a premium of 18.7 per cent to the three-month volume weighted average price (VWAP) which is significantly below the Australian market average for transactions of this nature," the board said in a statement.
"Although API's share price has recently traded above the price offered in the indicative proposal, the board recognises that the share price may trade below this level in the short term.
"Nevertheless, the Board will only progress a change of control transaction on terms that recognise the fundamental value of API and are in the best interests of API shareholders as a whole."
The group's leadership also points to anticipated earnings growth from API's investment in 39 new Clear Skincare clinics over the past three years since the business was acquired, amidst continued expansion of the network.
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