Sigma smartens up, sells pharmaDavid SymonsAugust 16, 2010 -...

Sigma smartens up, sells pharma
David Symons
August 16, 2010 - 12:05PM

Sigma Pharmaceuticals has acted smartly in moving to offload its pharmaceuticals division to South Africa's Aspen Pharmacare for $900 million, but there's no immediate bonanza for shareholders.

The pharmaceuticals division sale announced this morning, and due for completion in late October, has been preferred over a cut-price 55 cents a share takeover proposal from Aspen, or a mix-and-match asset sales to a range of buyers.

It has been clear for months that structural change is necessary at Sigma after an ongoing slump in profitability prompted $385 million in balance sheet impairments in April. Since that time, all options have been on the table as the company considers how best to regain control of $800 million in debt and securitised debt.

Sources close to Sigma have suggested that Aspen's takeover proposal was never seriously entertained. If that was the best takeover price on the table, the Sigma Board's preference was for an alternative that maintained the company's independence and provided the opportunity to build longer term value. However, from here it's going to be a long road back for Sigma, which raised $297 million at $1.02 a share last September.

After backing out the earnings of the pharmaceuticals division and applying a seven times EBIT margin to the remaining earnings - in line with the trading multiple of listed competitor API - a trading price of around 50 cents looks about right for Sigma shares.

The clearest opportunity for incoming Sigma chief executive Mark Hooper is to extract around $200 million in working capital from the company through tightening up the current (bloated) trading terms offered to selected pharmacy customers. Achieve that, and Goldman Sachs sees the company trading at 70 cents within two years.

Sigma shares were trading 2 cents higher at 52 cents in recent trade.