Brian Jamieson would have experienced a sense of dj vu as he and Sigmas new chief executive Mark Hooper wrestled with under-performing business, too much debt and a low-ball takeover offer.
Jamieson, Sigmas recently appointed chairman, was on the board of Oz Minerals when it was overwhelmed by the financial crisis just as it was putting in place new banking facilities after the Oxiana merger. After dealing with nervous and aggressive lenders, fending off vultures and ultimately selling just about everything other than its best asset, Prominent Hill, Oz Minerals is now a $3.7 billion company with a massive stash of cash.
Sigma was in an analogous position, dependant on the support of its lenders and with an urgent need to both reduce its leverage and do something about its struggling pharmaceutical division, where the combination of its own practices and intense competition in generics had destabilised the group and torn chunks from its balance sheet.
Its woes had also attracted a predator, with South Africas Aspen Pharmacare initially flagging a 60 cents a share bid before lowering it to 55 cents a share. In the absence of an alternative, Sigma would have had no option but to reluctantly embrace the Aspen approach.
Jamieson and Hooper have, however, developed and agreed in principle a more than viable alternative, announcing a quite different deal with Aspen today. They will sell the difficult pharmaceutical division to Aspen for $900 million, wiping out Sigmas net debt, leaving it with surplus cash and its profitable and simpler healthcare and retail division.
In the circumstances, thats an excellent outcome, just as Oz Minerals sale of its second-tier assets to Chinas Minmetals (now MMG) was a terrific outcome in its difficult circumstances.
The sale price of the pharmaceutical division represents a multiple of about 12 times the divisions earnings before interest and tax, which compares with the 10 times EBIT Aspen had proposed offering for the entire group. The healthcare business generates EBIT of around $70 million, so there will still be a significant business left within Sigma; one with a market share of about 30 per cent.
So, in an instant, Sigma would shed the division that destabilised it and emerge with a simpler structure, quite a lot of cash Sigma has on-balance-sheet debt of about $450 million and therefore the capacity to either fund sensible expansion of the healthcare business or, as Jamieson suggested today, return some capital to its shareholders.
The pharmaceutical business might have its issues but it also has interesting long-term prospects which Aspen, which is Africas largest pharmaceutical manufacturer and which has expertise in generics, would be very well aware of.
One of the reasons competition in generics has become so intense is that there is a swelling pipeline of blockbuster drugs coming off patent over the next few years, and therefore a battle for market share in anticipation of a boom in generics.
Sigma has about 25 per cent of the local market for generics it is the number-two player in the sector and Aspen will be able to bring its own expertise and access to generics to bear on the business, which will have a continuing supply relationship with Sigma.
Jamieson and Hooper needed to deliver either a significant increase in the value of a full takeover or an asset sale of sufficient size and value to completely stabilise the group and convince shareholders that the value extracted, and the upside retained, was better than the cash being offered while Sigma was on its knees. They appear to have done just that.
SIP Price at posting:
52.0¢ Sentiment: Hold Disclosure: Held
