Australia’s competition watchdog has raised a raft of red flags over Sigma Healthcare’s proposed $8.8 billion tie-up with Chemist Warehouse that is set to catapult the private retailer onto the Australian Securities Exchange.
Among its biggest concerns is that the mega-merger of Australia’s biggest pharmacy chain with a major wholesaler would raise barriers to rivals hoping to enter the pharmacy market or extend their footprints.
It also fears it would reduce competition in pharmacy retailing by removing the price pressure Chemist Warehouse and Sigma stores impose on each other and lead to higher prices for customers.
Sign up to The Nightly's newsletters.
Get the first look at the digital newspaper, curated daily stories and breaking headlines delivered to your inbox.
By continuing you agree to our Terms and Privacy Policy.
The Australian Competition and Consumer Commission’s preliminary report, released on Thursday, followed a three-month review of the proposed merger announced by listed Sigma and privately-held Chemist Warehouse in December.
Both companies run major pharmacy chains, along with wholesale businesses that supply there own and other smaller pharmacies.
“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” commissioner Stephen Ridgeway said.
“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level. We want to hear from interested parties, including rival pharmacies as we continue this review.”
Sigma’s share plunged almost 10 per cent to $1.08 in the first few minutes of trade following the ACCC’s announcement. They trimmed losses later in the session but still closed down 4.2 per cent to $1.15.
It told investors the ACCC “statement of issues” was not unexpected given the complexities involved in bringing together two big businesses.
But it remained adamant there were compelling arguments for why the union would not affect competition.
“We are co-operating closely with the ACCC and look forward to continuing to do so in the next phase of the merger review,” chief executive Vikesh Ramsunder said.
“The proposed transaction will ensure that Sigma, consistent with its regulatory obligations, can continue to serve franchisee and independent pharmacies alike with a competitive offering, whilst delivering a transformational change for all Sigma stakeholders.”
The ACCC said if given the green light, the deal would create a company that is “uniquely vertically integrated across multiple levels of the pharmacy supply chain” which could ultimately reduce competition.
Sigma already provides brand and support services to 400 community pharmacies operating as franchisees under its brands such as Amcal, Discount Drug Stores, PharmaSave and Guardian.
Chemist Warehouse is a franchisor of pharmacies and retail stores under the brands Chemist Warehouse, MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse. It is also a wholesaler and distributor, and provides brand and support services to its franchisee pharmacies.
Chemist Warehouse has 600 bricks-and-mortar stores in Australia, including 37 in WA. The retailer — which also operates in New Zealand, Ireland and China — generates about 70 per cent of revenue from “front-of-store” sales including cosmetics, vitamins and other non-prescription items.
The watchdog raised concerns that the proposed acquisition may harm pharmacies currently supplied by Sigma, given it is in its own interest to maximise wholesale sales. After the transaction, the independent pharmacies it supplies would also be competitors to Chemist Warehouse.
“In particular, we are focused on how the newly merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive,” Mr Ridgeway said.
It also flagged issues with the use of commercially sensitive data relating to pharmacies supplied by Sigma. It said independent pharmacies currently have three main choices for wholesale supply, and banner, franchise arrangements, but given the potential data concerns and risk of competitive harm, the effective options for some pharmacies may fall to two.
The watchdog said it had heard concerns about the impact Chemist Warehouse has had on the pharmacy sector but maintained its focus would remain only on what affect the merger could have on competition.
“The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products,” Mr Ridgeway said.
The ACCC said it was yet to reach a final view on the merger and has called for submissions by June 27. A final ruling could be made in early September.
Sigma chair Michael Sammells told the company’s annual general meeting late last month he was hopeful of a “positive decision” from the ACCC.
But in the event the proposed merger and backdoor listing onto the ASX does not proceed, he said retention of key skills, expertise and corporate knowledge would be critical in driving a standalone Sigma to continue to diversify the business, grow its margins, and identify and execute alternative strategic transactions.
Sigma previously forecast synergies of $60 million a year after the first four years of the combined group.
