Wesfarmers makes $680 million bid for Priceline Pharmacy owner

With such brands in its portfolio as Bunnings, Target, Officeworks and Catch.com.au, Wesfarmers (ASX: WES) is looking to boost its retail footprint by acquiring Australian Pharmaceutical Industries (ASX: API), the owner of Priceline Pharmacy which has 470 stores Australia-wide.

Wesfarmers' offer to buy all remaining shares in API at $1.38 per share comes at a 20.5 per cent premium to yesterday's closing price, and values the group at close to $680 million.

The price is only slightly higher than API's trading level before the pandemic began.

API also owns the anti-ageing, acne and laser clinics Clear Skincare and Soul Pattison Chemist, the latter in connection to Washington H. Soul Pattinson (ASX: SOL) which owns 19.3 per cent of API and has agreed to vote in favour of Wesfarmers' proposal.

"If the Proposal is successful, API would form the basis of a new healthcare division of Wesfarmers and a base from which to invest and develop capabilities in the health and wellbeing sector," Wesfarmers managing director Rob Scott says.

"The combination of Wesfarmers and API is a compelling opportunity to capitalise on API's strengths and positioning in these markets while drawing upon Wesfarmers' capabilities in retail and distribution, our strong balance sheet and our willingness to invest in our businesses for growth over the long term.

Scott says his company supports a community pharmacy model, including the pharmacy ownership and location rules, and considers API's relationships with its community pharmacy partners to be one of its key strengths.

"We see opportunities to build on these relationships and invest to expand ranges, improve supply chain capabilities and enhance the online experience for customers. These investments are expected to strengthen the competitive position of API and its community pharmacy partners," he says.

Today's offer comes as lockdowns in June and July have caused the temporary closure of 72 per cent of non-pharmacy company-owned Priceline stores, and 75 per cent of the Clear Skincare clinic network.

The API board is undertaking an analysis of the offer and has advised shareholders not to take any action.

A spokesperson for the Pharmacy Guild of Australia notes the guild will be monitoring the bid and examining any possible implications of it.

"The boards of both Wesfarmers and API have as a first obligation to act in the interests of their respective shareholders," the spokesperson said.

"The guild similarly has an obligation to its members and its members' patients and it will monitor this bid accordingly."

The announcement also coincides with the release of API's annual strategic review whereby the board has decided on an increased focus for both its pharmacy distribution and the two retail businesses Priceline Pharmacy and Clear Skincare.

As a result of this decision, API will cease manufacturing personal care and over-the-counter products in New Zealand and outsource their manufacture. 

API CEO and managing director Richard Vincent says a simplification of the business will allow API to escalate investment in its digital capabilities and accelerate initiatives to improve customer experience.

"We anticipate that Consumer Brands will generate in the order of $5 million incremental earnings before interest and tax (EBIT) per annum after we have wound down manufacturing in New Zealand by the second half of FY23," API CEO and managing director Richard Vincent says.

"By moving to outsourced contract manufacturing we will generate lower cost of goods and have greater continuity in product supply, both of which have been impeded by COVID related impacts.

"Taking into account the proceeds from the sale of the plant, we anticipate a net effect of $24.5 million at the EBIT level."

He says this one-off charge contains the carrying value of plant and equipment, inventory, employee and make good costs.

Vincent says until the most recent restrictions began in late May the company was on track to achieving a full-year underlying EBIT result of $75 million, buoyed by double digit sales growth for Clear Skincare clinics and positive like-for-like sales growth in the majority of Priceline Pharmacy stores.

Until the lockdowns, the group was also seeing growth in register margins and basket sizes and steadily improving like-for-likes in CBD stores.

"It is now clear that we need to revise our forecast to reflect the impact of the latest enforced closures," he says.

"On the basis that there is a relaxation of the existing COVID-19 restrictions in place including New South Wales by the end of July 2021 and no new restrictions between now and our financial year end on 31 August 2021, API now expects its full year underlying EBIT to be circa $66 million to $68 million, and its reported EBIT to be in the range of $31 million to $33 million (unaudited)," he says.

"In the event that the restrictions remain in their current form beyond the end of July the impact is a reduction of approximately $1 million in EBIT per week of extension.

"We will continue to actively review each Priceline company-owned store as they approach end of lease to ensure we have a robust and sustainable network based on the effect COVID has had on our customers' working and shopping patterns."

API has also confirmed that the build of its new Marsden Park distribution centre in north-west Sydney, at a cost of $50 million, remains on time and within budget. It is anticipated that this highly automated distribution centre will deliver a 20 per cent improvement in cost per unit with annualised savings in the order of $8 million EBITDA, flowing from the start of FY23.