SIG ASX: Chemist Warehouse lands Sigma Healthcare merger ...

“The second 30 years, what I need to do now is set up the next chapter of our story in new markets overseas or whatever, and then the last 30 years it’s up to the younger generation. It’s got little to do with money. Without getting emotional and sookie about it, it’s just a life dream. I saw Boots, and I said that’s who I want to be.

“It’s only taken 50 years, but we’ve got there in the end. Almost,” he added.

The Gance brothers bought their first pharmacy in 1972 in Reservoir, Melbourne, and Mr Verrocchi joined them in 1980. Together, they opened their first MyChemist branded store in 1997, followed by the first Chemist Warehouse in 2000.

In the last six years, the retailer has expanded into New Zealand, China and Ireland. Total sales across the company’s network reached $7.9 billion last year.

Chemist Warehouse generates about 70 per cent of its sales from front-of-shop items such as sunscreen, toothbrushes and make-up with the balance coming from drug dispensary, which is located at the back of the store. The average community pharmacy generates only about 27 per cent of its sales from front-of-shop items.

On Monday, Sigma told investors that it would raise $400 million as part of the merger, underwritten by Goldman Sachs, and its chief executive, Vikesh Ramsunder, will run the overall group. Sigma chairman Michael Sammells will also keep his position. Under the deal, Sigma will buy 100 per cent of Chemist Warehouse’s shares.

Mr Gance and two executives, Damien Gance and Danielle Di Pilla, will join the board. Ms Di Pilla is the cousin of Mr Verrocchi, and a franchisee for two decades. She is the sister of David Di Pilla, who’s HMC Capital holds 19 per cent of Sigma.

Mr Verrocchi called himself and the Chemist Warehouse team “hustlers” and “the guys in the back”, happily leaving Mr Ramsunder and Mr Sammells in their respective roles.

Mr Verrocchi and the Gance brothers will hold their shares in escrow, restricting them from trade until at least August 2025. The remaining 200 Chemist Warehouse shareholders will hold 37 per cent the group and will be able to trade their stock freely.

Mr Sammells said Sigma has had a commercial relationship with Chemist Warehouse and its founders spanning more than 40 years. “We are excited by the efficiencies, synergies and growth opportunities that we anticipate being unlocked through the merger of the two complementary businesses,” he said in a statement.

Sigma expects to find $60 million in cost savings annually, with earnings before interest and tax of more than $495 million. It will operate a combined network of 16 distribution centres across Australia and New Zealand. Sigma’s wholesale business supplies to over 1000 pharmacies, including 340 under the Amcal and Discount Drug Stores banners.

Mr Ramsunder said that when he joined Sigma in 2021 from South Africa’s Clicks Group, he did not think he would be doing a deal with Chemist Warehouse.

“I always knew that Sigma would have to at some stage either acquire or merge into something to continue to grow and scale and size. It was obvious. But the first thing was making sure that the strategy and the actual operational execution was strong,” he said.

Mr Ramsunder earlier this year convinced Chemist Warehouse to hand Sigma a $2 billion supplier contract when it came up for renewal, beginning early discussions about whether a merger was possible.

Chemist Warehouse has taken advice from Rothschild and Oaktower Partnership for eight years, including on a restructure and a new franchise model. As part of this, the 200 franchisees were compensated with equity in Chemist Warehouse.

Sigma has received approval from ANZ and National Australia Bank for a $1 billion debt facility to fund the cash required under the planned transaction, and to refinance existing debt of Chemist Warehouse.

The merger is expected to be completed in the second half of next year, pending regulatory approvals including from the Australian Competition and Consumer Commission. If the deal fails, Sigma will continue to operate as a standalone company.

Sigma’s board told shareholders to back the deal, saying it is “expected to create material value for Sigma shareholders”. Both institutional and retail shareholders will be entitled to subscribe for 1 new Sigma share for every 1.85 Sigma shares. The offer will be placed at 70¢ per new share, an 8.2 per cent discount to Sigma’s last traded price of 76.25¢ on December 6, ahead of news that a deal was under way.

The Pharmacy Guild, a powerful lobby group for the sector, flagged concerns about the deal last week, saying it raised competition issues and pharmacy ownership concerns.