Pharmacy giant Chemist Warehouse has about 600 stores, including 42 in New Zealand. Photo: 123RF
After months of speculation and years of offers that have fallen flat, the discount pharmaceutical juggernaut that is Chemist Warehouse has struck a deal with Sigma Healthcare to create the biggest pharmacy company in Australia.
From its humble beginnings in Melbourne in 1972 before rebranding to Chemist Warehouse in 2000, the pharmacy franchise has gone from strength to strength, opening hundreds of stores around Australia while remaining a private company worth billions of dollars.
Its founders have been subjected to various offers for the company over the years but have now struck a deal that will not only take the company public, but will see it scale up substantially to be one of the biggest retail companies in Australia.
Here's how the merger came to fruition, why it's a big deal in the Australian business landscape and what it means for Chemist Warehouse pharmacies around Australia.
What's happening with Chemist Warehouse?
On Monday morning, it was confirmed that the parent company of Chemist Warehouse, CW Group Holdings, had entered into a merger agreement with Sigma Healthcare.
The deal would see Chemist Warehouse merge with Sigma Healthcare to create "a leading healthcare wholesaler, distributor and retail pharmacy franchisor".
In other words, the deal would see these two companies join forces to create a giant in the pharmacy retail space, from product creation to selling them instore, with a total value in excess of A$8.8 billion.
Not only would that make them the biggest pharmacy brand in the country, it would also make them one of the biggest publicly listed companies on the Australian Securities Exchange (ASX).
Whatever way you look at it, it's a monumental deal for a company that first started in 1972 in Melbourne before morphing into the retail giant we know today.
There are now around 600 Chemist Warehouse stores in four countries, with the majority of them in Australia, 42 in New Zealand, and six each in Ireland and China.
Additionally, Chemist Warehouse has 21 stores under the My Chemist brand and 17 Ultra Beauty stores located within select Chemist Warehouse stores.
Chemist Warehouse is also part-owner of a number of brands it stocks in its stores, including Bondi Protein Co, Goat Soap, Barely Intimate Skincare, Bambi Mini and the Wagner supplement brand.
What is Sigma Healthcare?
You may not know their name, but they are a company behind a lot of brands you are likely familiar with and have bought products from before - namely, their pharmacies.
Sigma owns four different retail pharmacy brands: Amcal, Discount Drug Stores, Guardian and PharmaSave.
There are around 400 pharmacies around the country that operate under those brands but collectively, Sigma operates another 800 pharmacies around Australia.
Additionally, Sigma also has its own brands and private labels, including Amcal-branded items including pain relief, lozenges, vitamins and cold and flu tablets.
Sigma has ownership stakes in specific brands sold at its stores, including Beauty Theory (which sells items like bobby pins and hair brushes) and Pharmacy Care (which sells skincare, pain relief, baby products and health devices like blood pressure monitors and thermometers).
Sigma also operates nine distribution centres across Australia and owns three of them outright, and also creates its own products, supplies those products to other pharmacies and sells those same products at its own pharmacies around the country.
In other words, Sigma Healthcare is entirely involved in the entire pharmaceutical process from product creation through, distribution, wholesale and retail stores.
Why is this such a big deal?
In short, it's because it's creating a massive corporate giant in Australia.
The merger of Sigma Healthcare and Chemist Warehouse will see the creation of a company with a value in excess of A$8.8 billion.
It also makes Sigma Healthcare a substantially bigger player in the market. Right now, Sigma has a market capitalisation of A$810 million - but the deal grows its value by almost 11 times.
But it's not only the monetary value of the company that makes this such a big deal - it would also make it one of the top 100 companies listed on the ASX.
In comparison, the two companies combining will create a company as big as BlueScope Steel, Seek, TPG, Qantas and Treasury Wine Estates (which owns major Australian wine brands, including Penfolds).
(For context, BHP is the biggest company listed on the ASX, with a market capitalisation of almost A$242b.)
The merger is also a significant development in the corporate history of Chemist Warehouse, which has long been the subject of public listing speculation.
For a long time, Chemist Warehouse was seen as having two options when it came to becoming a publicly listed company: either through an initial public offering (IPO) or a trade sale.
But when speculation ramped up again in June that Chemist Warehouse was looking to go public, a third option entered the arena: joining forces with Sigma Healthcare, which is already listed on the ASX. Given Chemist Warehouse is the larger of the two companies, it would give them control of Sigma Healthcare and is considered a "back door" entry to the ASX.
At the same time, Chemist Warehouse signed a contract with Sigma that meant the healthcare company would supply it with medicines listed on the Pharmaceutical Benefits Scheme (PBS) and fast-moving consumer goods (FMCG) products for five years, starting on 1 July, 2024.
When the deal was signed, Sigma estimated that the total sales of products to Chemist Warehouse would generate a minimum of A$3b in revenue in the first year of the contract alone.
The two companies also have a longstanding commercial relationship spanning more than 40 years, Sigma chairman Michael Sammells told investors on Monday.
The other reason this merger is such a big deal is that combined, Chemist Warehouse and Sigma Healthcare will have over 1000 retail stores between them and 16 distribution centres in Australia and New Zealand.
Not only would that make them the biggest pharmacy group in the country, it would make them one of the biggest retail companies in Australia that can create its own brands and sell them in its own stores as well as to other pharmacies.
However, this isn't the first time Sigma has shopped around for a pharmacy group to join forces with. In 2021, it entered a takeover tussle by beating Wesfarmers' bid for pharmacy group API, which owns Priceline and Soul Pattinson Chemists.
What does it mean for Chemist Warehouse stores?
Although the ownership structure of the two companies might change, it doesn't mean it's the end of the road for the physical Chemist Warehouse and My Chemist stores, or the Amcal, Guardian, Discount Drug Store and PharmaSave stores operated by Sigma.
The merger between the two, presented to investors on Monday, shows that the brands will remain in their current forms, as they were "complementary" across "broad market segments".
In other words, the merger will create three tiers of pharmacy that won't compete with each other: the big box discount (Chemist Warehouse), the full service (Amcal, My Chemist) and the discount (Discount Drug Stores).
The combining of the two companies outside of the retail space will mean they can increase their scale and produce their own private label items which they can on-sell to generate more revenue, open more pharmacies, and expand into other markets internationally.
As Sigma explained to investors on Monday, the merger will create a "full-service wholesaler, distributor and retail pharmacy franchisor" that combines "state-of-the-art distribution infrastructure" with "leading retailing know-how".
A bigger company also means there is a larger, "more diversified earnings base", and they can collectively save A$60m annually by streamlining their processes as there is some double-up right now.
Its wider network could also mean new franchisees come on board to open additional Chemist Warehouse stores - so we could see more pharmacies open in the future.
When does the deal become official?
So far, both Chemist Warehouse and Sigma have signed onto the deal, but it will need to pass a lot of regulatory checks and balances before it's done and dusted.
The deal will need to be approved by the Australian Competition and Consumer Commission (ACCC), the Federal Court to ensure it complies with the Corporations Act, Chemist Warehouse's shareholders, as well as Sigma Healthcare investors - plus a possible approval from New Zealand's Overseas Investment Office (OIO), given Chemist Warehouse has 42 stores across the Tasman.
If it clears those regulatory hurdles, the merger will be put to Sigma's shareholders, which will require a vote in favour of 75 percent or more.
Only after that happens will the deal go through, and Sigma told investors on Monday morning it expects that will all occur and be given the green light to merge sometime in the second half of 2024.
Once the merged company becomes listed on the ASX, it means investors can buy and sell shares in Chemist Warehouse, and the company will have to publicly report its earnings by law.
But all of that takes time - so don't expect anything to happen for several months while all the paperwork is sorted.
- This story was first published by the ABC.
