ACCC could block merger, page-2

SIGMA HAS SHOT ITSELF IN THE FOOT...


Sigma could shed customers after Chemist Warehouse merger
Carrie LaFrenz and Tom Richardson
Dec 12, 2023 – 6.02pm
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Chemist Warehouse’s proposed listing with Sigma Healthcare, creating an $8.8 billion listed retail giant, will likely lead to a loss of independent pharmacies buying from the company’s wholesaler business and could be blocked by competition regulators.
That’s the verdict from brokers after Chemist Warehouse chief executive Mario Verrocchi, one of two billionaire founders, said he wanted to build an Australian version of wildly successful British pharmacy Boots.
Jefferies analyst David Stanton told clients in a note that most pharmacies use two wholesalers. Should this deal complete, Dr Stanton pharmacists who use Sigma as a wholesaler could look elsewhere.

Sigma CEO Vikesh Ramsunder and Chemist Warehouse co-founder, Mario Verrocchi (right). Eamon Gallagher
“Independent pharmacies may switch wholesalers at the end of contracts, and in the short term may favour a different pharmacy wholesaler,” Dr Stanton said.
“We believe there is the potential for loss of independent pharmacists in the medium term who use SIG as a wholesaler, as these pharmacists may not wish to use a combined entity that is a potential retail threat to their business.”
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The $26 billion retail pharmacy industry is dominated by EBOS-owned Symbion, Wesfarmers-backed API and Sigma as the three key wholesalers dispensing medicines to chemists. They all have franchise operations. Sigma supplies over 1000 aligned pharmacies, including 340 under the Amcal and Discount Drug Stores banners.
The proposed merger is subject to a number of conditions, including approval from the Australian Competition and Consumer Commission and, potentially, from New Zealand’s Overseas Investment Office.
An ACCC spokesman said it would commence a public review to assess potential competition impacts once it received a submission from the parties involved. “The public review will invite submissions from all interested stakeholders,” he said.
Shane Ponraj, a retail analyst at Morningstar, said if the deal went ahead, the combined Sigma and Chemist Warehouse business would have a competitive advantage from being vertically integrated and more negotiating power due to its scale. He estimated it would have more than 50 per cent of the retail market.
“They’ll definitely have cost advantages, buying power and economies of scale over the competition. But we think there’s going to be a lot of resistance to the merger from the Pharmacy Guild of Australia that wants to protect independent pharmacies and the ACCC wants to protect competition,” he said.
“We think it’s likely the ACCC won’t approve it [the deal].”

Founded by the Gance and Verrocchi families in Melbourne, Chemist Warehouse has grown into a leading Australian retail pharmacy franchisor, with an international network of more than 600 stores.
In 2012, the ACCC rejected a proposed merger of API and Sigma, arguing it would harm competition and have a market share of more than 60 per cent in NSW, Queensland and Victoria.
One pharmacy executive, who spoke on condition of anonymity, said competitive tension would reduce after the merger butthe ACCC would approve the transaction. He suggested Sigma’s value discount pharmacy brand, Discount Drug Stores, a direct competitor to Chemist Warehouse, might have to be sold off.
“That is the primary brand that independent pharmacists would go to if they wanted a discount store model but not Chemist Warehouse,” he said. “There’s a reduction in competition. But I still think it gets through.”
But a long-time owner of multiple independent pharmacies, who wished to remain anonymous, said she did not expect the competition regulator to have any concerns.
“There’s very little movement at Chemist Warehouse. There are very few people who leave, so to me that’s always been a sign that their franchisees are happy. It says they are delivering a good product, and a good model,” she said.
“The end of the day, the pharmacies are owned by the pharmacist, and they can exit those franchise agreements and walk away to another franchise provider of their choice at any time. So it’s actually not restricting choice.”