Australian here thanks for covering one of our companies and reminding me about the deal. I knew chemists in Australia were highly regulated but wasn't aware of the details like that, so that was interesting to learn. In addition my first thought when hearing an Australian business expanding overseas wasn't good as I am also aware of quite a few failures, but as you said there are also some success stories as well.
When it was first announced I took a look at the price of Sigma and by my rough estimates I thought Sigma's shareholders were getting screwed over. If I look at the Sigma price it seems the market agreed with me with the stock price going from the mid 30's to 20's. However I still think its overvalued
- Management said combined EBITDA for 2023 without synergies would have been 495m.
-By next year assuming we get some growth and synergies we can get to 600m
-14.5% is 87m
-Sigma's current market cap is 2.7bn
- 2700/87 = 31
That still seems a bit expensive for me give many unknowns still with as you said many related party transactions, complex ownerships and not to mention the reverse merger.
I have also been thinking there might be more competition introduced to Chemist Warehouse in Australia soon. In 2022 Wesfarmers an Australian conglomerate took over API, another pharma distributor, which owns Priceline, another pharmacy group with 470 locations
Wesfarmers in the past ran one of Australia's large supermarkets Coles which it took over in 2007 and improved the operations of and then spun it off in 2018. They however kept Bunnings the largest Australian hardware chain which is an extremely profitable retailer. I wouldn't classify Wesfarmers as a world class company they have made plenty of errors, including initially overpaying for Coles, but seem to be good at operating retail. For a personal anecdote, I work for a large company in Australia and every year we get vouchers for flu vaccines which are usually for Chemist Warehouse, but this year it was for Priceline.
Thanks for your comment. Great colour and much appreciated.
The deal was incredibly favourable to Sigma's shareholders at the then prevailing 70c share price. I agree it may be closer to fair value at today's 1.25 -- with a wide range of outcomes depending on CW's success in international execution.
Wesfarmers' ownership of API is definitely an interesting dynamic to watch. Historically, Priceline has been at a structural disadvantage to Chemist Warehouse, because individual pharmacist franchisees had too much power, and so head office (the franchisor) was not able to manage effectively.
A comment from an expert on Third Bridge is helpful - this is from back in October 2021:
"[F]ranchising in pharmacy is very challenging. It’s because of the power differential is different to every other franchise. The pharmacist owns the government licence to have the pharmacy in a particular location, and without that the franchisor, the owner of the franchise, couldn’t have a franchise in pharmacy, and so there’s a different franchising power balance that’s difficult to manage. One of the reasons Chemist Warehouse has grown is they’ve built a structure and they have a management style that’s very aggressive, and they get very good compliance across their store network, but all the other brands of pharmacy have found that harder and they’ve had to influence, cajole and get pharmacists to be more compliant with their brand offer.
The two that have done OK, of course, are Terry White and Priceline Pharmacy, but they’re not perfect at it."
Thanks for a great article. Moved last year to NZ from The Netherlands so might have an interesting perspective. In NZ Chemist Warehouse has no direct competitor. They compete with specialist pharmacies, department stores, supermarkets, and online.
Personally, I think their stores are not special. In the Netherlands there is a dominant chain called Kruidvat which is way better in my opinion (owned by CK Hutchison).
I would be surprised if this chain succeeds outside Australia/NZ.
Too early to ascribe too much value to these operations.
Hi Wubbe, thanks very much for your comment and your insight as a customer (or indeed non-customer).
It's a great idea to look at CK Hutchison's retail segment as a comp. They've provided detail segment data in the current structure going back to 2012.
Total retail performance looks mediocre in that time, with 2.6% / 2.2% revenue and EBITDA cagrs. Western Europe specifically was a bit better, with 4.0% / 6.2% cagrs.
I wonder if Kruidvat is a small gem amid other weaker CKH retail businesses? In the UK I'm not a big fan of their Superdrug and Savers formats. Assessments of retail formats are quite personal, depending on whether one belongs to the targeted demographic, etc.
(The 1HK stock overall has been poor, but retail is presumably far from the key driver at group level.)
Thanks for your response. I clearly see the unique positioning they have in NZ. Just not sure how well this will translate. Guess we will see. Maybe I'm to conservative in seeing little value in the international expansion.
CKH retail has deteriorated in China. Will be interesting to see if they can recover.
Not an expert on the pharmacy market in the UK, but more in general I see a lot of business models working in NZ/AUS that are not as great in other regions.
It's a good question. None of the analysts asked them about it at the meeting.
Three potential answers spring to mind -- two neutral, and one negative. Make your own mind up about which is most likely.
1) The traditional IPO market has been shut to all large issuers for a while due to weak market conditions. So they couldn't be sure of getting a traditional IPO away, certainly not at a price they would have liked. This alternative doesn't depend on market conditions or setting a specific price, and gives the founders very low dilution.
2) They actually positively like the Sigma benefits -- access to its additional pharmacies, the vertical integration of wholesale supply, maybe even the CEO with relevant international experience, who knows. ACCC risk is something they'd be pretty comfortable with, given their entire success has been based on understanding regulations and finding a way through that sails close to the limit.
3) CW specifically feared a traditional IPO process as they would not be able to stand up to the full scrutiny, due to some kind of skeletons in the closet. They chose the backdoor route specifically to avoid scrutiny.
Australian here thanks for covering one of our companies and reminding me about the deal. I knew chemists in Australia were highly regulated but wasn't aware of the details like that, so that was interesting to learn. In addition my first thought when hearing an Australian business expanding overseas wasn't good as I am also aware of quite a few failures, but as you said there are also some success stories as well.
When it was first announced I took a look at the price of Sigma and by my rough estimates I thought Sigma's shareholders were getting screwed over. If I look at the Sigma price it seems the market agreed with me with the stock price going from the mid 30's to 20's. However I still think its overvalued
- Management said combined EBITDA for 2023 without synergies would have been 495m.
https://investorcentre.sigmahealthcare.com.au/static-files/d2c377b3-f487-4488-b34d-43c02330e6b7
-By next year assuming we get some growth and synergies we can get to 600m
-14.5% is 87m
-Sigma's current market cap is 2.7bn
- 2700/87 = 31
That still seems a bit expensive for me give many unknowns still with as you said many related party transactions, complex ownerships and not to mention the reverse merger.
I have also been thinking there might be more competition introduced to Chemist Warehouse in Australia soon. In 2022 Wesfarmers an Australian conglomerate took over API, another pharma distributor, which owns Priceline, another pharmacy group with 470 locations
https://en.wikipedia.org/wiki/Priceline_(Australia)
Wesfarmers in the past ran one of Australia's large supermarkets Coles which it took over in 2007 and improved the operations of and then spun it off in 2018. They however kept Bunnings the largest Australian hardware chain which is an extremely profitable retailer. I wouldn't classify Wesfarmers as a world class company they have made plenty of errors, including initially overpaying for Coles, but seem to be good at operating retail. For a personal anecdote, I work for a large company in Australia and every year we get vouchers for flu vaccines which are usually for Chemist Warehouse, but this year it was for Priceline.
Thanks
Thanks for your comment. Great colour and much appreciated.
The deal was incredibly favourable to Sigma's shareholders at the then prevailing 70c share price. I agree it may be closer to fair value at today's 1.25 -- with a wide range of outcomes depending on CW's success in international execution.
Wesfarmers' ownership of API is definitely an interesting dynamic to watch. Historically, Priceline has been at a structural disadvantage to Chemist Warehouse, because individual pharmacist franchisees had too much power, and so head office (the franchisor) was not able to manage effectively.
A comment from an expert on Third Bridge is helpful - this is from back in October 2021:
"[F]ranchising in pharmacy is very challenging. It’s because of the power differential is different to every other franchise. The pharmacist owns the government licence to have the pharmacy in a particular location, and without that the franchisor, the owner of the franchise, couldn’t have a franchise in pharmacy, and so there’s a different franchising power balance that’s difficult to manage. One of the reasons Chemist Warehouse has grown is they’ve built a structure and they have a management style that’s very aggressive, and they get very good compliance across their store network, but all the other brands of pharmacy have found that harder and they’ve had to influence, cajole and get pharmacists to be more compliant with their brand offer.
The two that have done OK, of course, are Terry White and Priceline Pharmacy, but they’re not perfect at it."
Thanks for a great article. Moved last year to NZ from The Netherlands so might have an interesting perspective. In NZ Chemist Warehouse has no direct competitor. They compete with specialist pharmacies, department stores, supermarkets, and online.
Personally, I think their stores are not special. In the Netherlands there is a dominant chain called Kruidvat which is way better in my opinion (owned by CK Hutchison).
I would be surprised if this chain succeeds outside Australia/NZ.
Too early to ascribe too much value to these operations.
Hi Wubbe, thanks very much for your comment and your insight as a customer (or indeed non-customer).
It's a great idea to look at CK Hutchison's retail segment as a comp. They've provided detail segment data in the current structure going back to 2012.
Total retail performance looks mediocre in that time, with 2.6% / 2.2% revenue and EBITDA cagrs. Western Europe specifically was a bit better, with 4.0% / 6.2% cagrs.
I wonder if Kruidvat is a small gem amid other weaker CKH retail businesses? In the UK I'm not a big fan of their Superdrug and Savers formats. Assessments of retail formats are quite personal, depending on whether one belongs to the targeted demographic, etc.
(The 1HK stock overall has been poor, but retail is presumably far from the key driver at group level.)
Thanks for your response. I clearly see the unique positioning they have in NZ. Just not sure how well this will translate. Guess we will see. Maybe I'm to conservative in seeing little value in the international expansion.
CKH retail has deteriorated in China. Will be interesting to see if they can recover.
Not an expert on the pharmacy market in the UK, but more in general I see a lot of business models working in NZ/AUS that are not as great in other regions.
any opinion on why they would choose to do a backdoor IPO that risks regulatory block versus a traditional IPO?
Thanks for commenting.
It's a good question. None of the analysts asked them about it at the meeting.
Three potential answers spring to mind -- two neutral, and one negative. Make your own mind up about which is most likely.
1) The traditional IPO market has been shut to all large issuers for a while due to weak market conditions. So they couldn't be sure of getting a traditional IPO away, certainly not at a price they would have liked. This alternative doesn't depend on market conditions or setting a specific price, and gives the founders very low dilution.
2) They actually positively like the Sigma benefits -- access to its additional pharmacies, the vertical integration of wholesale supply, maybe even the CEO with relevant international experience, who knows. ACCC risk is something they'd be pretty comfortable with, given their entire success has been based on understanding regulations and finding a way through that sails close to the limit.
3) CW specifically feared a traditional IPO process as they would not be able to stand up to the full scrutiny, due to some kind of skeletons in the closet. They chose the backdoor route specifically to avoid scrutiny.