While Sigma Pharmaceuticals has put a $2.20 a share cash offer on the table for struggling rival, Australian Pharmaceutical Industries, someone seems to believe Santa Claus will mount a counter bid. API shares ended 3c down at $2.33 on Friday on 7.473 million shares.
Santa won't be leaving any fat presents for API, its board, managers or shareholders this Christmas.
And if rival Symbion bids then it will be marked down because hard-headed investors and analysts are not happy with the underlying message from API and its profit update on Thursday.
In fact there's a feeling that API could be a bit of a black hole where stuff goes in and no one is certain where it goes.
But one thing that has captured the attention of investors is the emergence on Friday morning of a new substantial shareholder in API: a Sydney company called Cardiac Jolt Pty Ltd has appeared with a 5.33 per cent shareholding, much of which seems to have been picked up in the market as Investec sold down its substantial stake in recent weeks.
But Cardiac Jolt's ownership has got eyebrows a rising: some investors wonder if it could mean corporate interest in API from another quarter.
Cardiac Jolt is a company whose address in Sydney is the well known criminal law firm, Murphy's Lawyers and not one of the mainline corporate lot such as Freehills or Baker and McKenzie or Clayton Utz.
And Murphy's Lawyers is associated with well known Sydney lawyer, Christopher Murphy: in fact a Christopher Murphy signed the substantial shareholding notice lodged with the ASX.
He's more noted for criminal proceedings (He has a car with the licence plates 'Verbal') not corporate plays.
So Sigma and others (such as big shareholder, Washington Soul Pattinson) will be wondering just what Murphy and this company are doing on the API register.
Sigma said Friday that it was now proposing to offer $2.20 an API share cash: the cash and shares alternative has been removed, so there will be no capital gains relief for API shareholders from the scrip part of the offer.
It's a sign that Sigma knows it is now in a position of strength: so long as the ACCC says yes which that is still very problematic given that Sigma will have around two-thirds of the country's drug distribution market by buying API.
Sigma proposed offer values API at $566 million.
API Thursday revealed a $7 million first-half loss because of charges for lost inventory and accounting. Sigma says it will only proceed with the offer only if it got full support from the API board and also access to API's accounts, and any bid would have to meet regulatory requirements.
Sigma shares rose 9c, to $2.85.
Analysts say that Sigma will now wait until the full interim results for API which are due around December 19.
They point out that API seemingly earned $17 million in the six months to the end of October, but incurred around $24 million in so-called one-off losses, to produce the $7 million loss mentioned in Thursday's update.
API said:" The one off expenses are related to obsolete stock, stock shrinkage, completion of the FY06 accounts and other restructuring provisions. The company has also reviewed its processes and some of the issues may relate to prior periods. None of the one offs are related to the unreconciled $17.2 million that was part of the 2006 full year financial results."
Analysts say the phrases "obsolete stock" and "stock shrinkage" are the big worries: the former relates to old stock (worrying in a pharmaceutical distribution company) and indicates that API is not keeping track of stock, while "stock shrinkage" is a euphemism for theft or loss of stock in suspicious circumstances, which again indicates very poor controls and security.
And this statement worried analysts
"In addition, the fundamentals of the business are still there. Retail sales for the first half have grown by 11% and Priceline Pharmacy continued to experience high demand and is now at 87 stores. Gross sales in the first half for the Pharmacy business are broadly in line with the prior corresponding period although overall the business lost market share,"
So while retail sales are growing "by 11%" and there's high demand for Priceline Pharmacy" gross sales in the pharmacy business are broadly "in line with the prior corresponding period" which suggests there's no growth: either they are higher or lower than the pcp.So the question is, does API management and the board really have a handle on what's going on in the business?
So it was no wonder Sigma an unusual warning to the market saying: "At this stage there is no certainty that merger terms will be agreed or that a formal offer will be made. Shareholders should exercise caution in trading in the shares of either company."
Don't say you haven't been warned.
TLS Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
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