Woolworths Group (ASX: WOW) has today thrown its hat in the ring to acquire Australian Pharmaceutical Industries (ASX: API) for $872 million, representing a 13 per cent premium to the offer on the table from retail rival Wesfarmers (ASX: WES).
The board of API, which owns the Priceline brand under a community pharmacy model with 470 stores nationwide, has concluded the new proposal at $1.75 per share represents "compelling value" for shareholders and is superior to the Wesfarmers’ scheme of arrangement.
Perth-based Wesfarmers' proposal already represented a 35.4 per cent premium to API's closing share price before a bidding war began that also included Sigma Healthcare (ASX: SIG).
The API board had previously unanimously recommended shareholders vote in favour of that arrangement in the absence of a superior proposal.
The additional $108 million in the Woolworths offer is hard to ignore, with the board also noting the suitor has indicated it supports the current ownership provisions and location rules which ensure that community pharmacies are well distributed throughout the community.
"Accordingly, the API Board has determined to allow Woolworths to undertake confirmatory due diligence to facilitate a binding offer, subject to entering into an appropriate confidentiality agreement and agreeing a focused confirmatory due diligence process," API said in an ASX release this morning.
"The Board notes that there is no certainty that the engagement between API and Woolworths will result in a change of control transaction or an offer capable of acceptance by API shareholders.
"The API Board has not agreed with Woolworths a binding process or timetable and intends to discuss these aspects further with Woolworths."
The company also explained the Wesfarmers scheme of implementation deed (SID) contains a matching right in favour of Wesfarmers, which is excercisable before API enters into any binding agreement relating to a competing proposal.
Woolworths Group CEO Brad Banducci said there was a compelling strategic rationale to support the acquisition of API, which is also the parent company of Soul Pattinson Chemist, Pharmacist Advice and Clear Skincare, a non-surgical skincare clinic business.
"Health and wellness is a large, fast-growing category and API would be a fantastic addition to our food and everyday needs ecosystem," Banducci says.
"If successful, we will continue to support API’s community pharmacy partners to deliver better experiences for both customers and pharmacists. We will also work to strengthen API’s wholesale and distribution business to ensure that all Australians continue to have timely, cost-effective access to a full range of PBS and other medicines, via their community pharmacy, regardless of where they live."
Banducci says customer expectations across retail are evolving in areas like convenience, innovation, and value.
"Through our broad range of retail services and capabilities built over many years in areas such as digital; retail media; loyalty; payments; analytics; and supply chain, we can support the industry through this change and help create additional opportunities for community pharmacy partners to deliver further solutions for their customers," he explains.
"The combination of the two businesses is expected to lead to material shared benefits and synergies, much of which will be reinvested back into strengthening and growing API and its pharmacy partners.
"If successful, the transaction is expected to be funded from the Group’s existing balance sheet capacity and to deliver attractive returns for Woolworths Group shareholders over the medium term."
As part of its due diligence investigations, Woolworths Group is also willing to explore potential alternative control transaction structure options such as a takeover bid with a minimum acceptance condition of 50.1 per cent and/or other transaction structures that would be subject to receiving 50.1 per cent API shareholder support.
A spokesperson for the Pharmacy Guild of Australia said it was monitoring the bid and examining any possible implications for community pharmacies and the patients they serve.
"The Guild also has a number of questions surrounding this bid,” the spokesperson said.
"Why is a company with interests in the alcohol, tobacco, gambling and nightclub industries wanting to move into healthcare?" the spokesperson asked. Woolworths technically reduced its exposure to these industries through the demerger of Endeavour Group (ASX: EDV), although post-demerger Woolworths retained a 14.6 per cent shareholding.
"How does it hope to convince Australians that it is serious about their health and welfare?"
The guild spokesperson asked how Woolworths would ensure the successful community pharmacy model, which is custodian of the Pharmaceutical Benefits Scheme (PBS), is protected and maintained.
"We look forward to having many conversations with the Woolworths team as well as with Prime Minister Scott Morrison and Leader of the Opposition Anthony Albanese on these important questions," the spokesperson said.
The spokesperson said the Guild recognised that the boards of both Woolworths and API had as a first obligation to look after the interests of their respective shareholders.
“Similarly, the Guild has a duty to our members and their patients and we will act accordingly in their interests.”
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