Chemist Warehouse deal will make Sigma stock a global attraction

Sigma, worth $810 million on a market capitalisation basis, will morph into an $8.8 billion giant which is a galaxy far, far away from its current home.

To achieve this, the group will borrow $1 billion from ANZ and National Australia Bank, give $700 million of that to CWG shareholders and issue them scrip equivalent to 85.75 per cent of the combined group.

What you get is Australia’s biggest pharmacy group.

The enlarged entity will supply 1000 pharmacies across CWG’s Chemist Warehouse and MyChemist and Sigma’s Amcal and Discount Drug Stores chains, and have a giant distribution business with 16 data centres. There will also be a big private label business.

The combined business is a full-service wholesaler, distributor and retail pharmacy franchisor.

The two merger buddies make a combined $495 million in earnings before interest and tax a year, and there is potential for a further $60 million in synergies (per Monday morning’s investor presentation). Expect Sigma’s camp to explain to investors that the true FY25 or FY26 EBIT forecast should be much higher.

For context, the synergies alone are more than double Sigma’s EBIT in the last financial year. CWG’s EBIT must be about 20 times Sigma’s efforts last year. It is a whopper deal and the sort of transaction that can only happen when you have very willing participants.

Sigma, battling along under the radar and kicked over by the likes of Woolworths and Wesfarmers in the past, is clearly sick of life as a relative minnow.

Triple track

Rothschild-advised Chemist Warehouse, which has only been around since the Sydney Olympics, has eyed the ASX boards for the past few years, but could not find its window. It chipped away on getting its internal structures and business ripe for the bourse, and was waiting for market conditions to improve.

CWG’s owners, a group of 200-odd shareholders spearheaded by the founding Gance and Verrocchi families, considered a bunch of deal structures including the IPO, reverse takeover and full or partial sale to private equity.

Each path had its own ups and downs, but the goal was to set up a viable long-term structure that would allow some of the shareholders to realise a stonkingly good investment now and create avenues and options for others to selldown over time.

With the IPO market shut, and private capital not a natural fit, Sigma emerged as the leading contender a few months ago and Project Orbit was born.

In the middle of the two camps was David Di Pilla, founder of investment firm HMC Capital and an astute dealmaker, who can think like both a business founder and financial investor and the two sides of this deal well.

In the past year or so, Di Pilla’s HMC Capital bought a 19 per cent Sigma stake, Sigma re-won the coveted Chemist Warehouse supply contract not long after, and before you know Sigma is signing (not just considering) an unthinkable deal to swallow one of Australia’s best retail groups.

Champagne on ice

Di Pilla is not everyone’s cup of tea, but he sure knows how to stitch a deal together. He made his name as an investor buying Woolworths’ old Masters property portfolio nearly a decade ago, and has been consistently ahead of the curve since.

His HMC Capital has $8.1 billion in funds under management, two-thirds of which is in real estate, and 93 per cent total shareholder return since its own IPO three years ago.

Sigma and CWG’s shareholders will have the champagne on ice until regulatory hurdles are cleared. Australian Competition and Consumer Commission looks like the big one; the antitrust regulator is always interested in anything to do with healthcare or pharmacies, and this thing is a giant vertical integration play.

How will it trade? Who knows? Fund managers and analysts have an 80-page investor presentation to digest and will seek meetings with Sigma chief executive Vikesh Ramsunder in coming days.

The 80-page presentation posed a lot more questions than it answered; there was nowhere near the level of detail that you would get in an IPO prospectus, including around things like franchisee agreements and supply contracts.

We are told to expect a lot more of that detail once the scheme booklet is released, which is slated for late next year following ACCC approval (assuming it comes). Fund managers will welcome the disclosure; yes, they have followed the Chemist Warehouse story from afar from years, but private ownership has always afforded it plenty of secrecy around its set-up and how exactly the head company makes its money.

For now, it is safe to say the bulked-up Sigma will not trade like a normal $10 billion company, given the restricted shares, although those involved in the deal are hopeful it can crack the top-100 stocks and trade like a proper large cap.

But you have to applaud Sigma for getting Project Orbit this far. It has already put the company in another stratosphere as far as navigating a complex deal is concerned.