The Australian Pharmaceutical Industries Ltd (ASX: API) share price and Sigma Healthcare Ltd (ASX: SIG) share price are among the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index today as brokers question the merger of the two groups.
The API share price crashed 5.5% to $1.51 while the Sigma share price tumbled 2.6% to 56.5 cents ahead of the market close. This makes API the worst performer on the AX 200 while Sigma is the third worst with the Perpetual Limited (ASX: PPT) share price in second spot.
This marks a sharp reversal to the share price surge of API and Sigma after API confirmed it had lobbed a takeover bid for its embattled rival.
Market of disbelievers
The market is rating the chance of the merger as slim given that the offer from API to pay 23 cents in cash and 0.31 of its scrip for every Sigma stock is substantially higher than Sigma's current share price.
API's offer values Sigma at close to 70 cents per share – a 19% premium to Sigma's shares.
What's hurting sentiment is that most of the top brokers have taken a dim view of the deal with Credit Suisse saying that the risks of the Australian Competition and Consumer Commission (ACCC) blocking the marriage outweighs the benefits from the union.
Reward not worth the risk
"In 2002, the ACCC dismissed an API/SIG merger on competition concerns as it would have created a duopoly in the wholesaler distributor market with the two largest entities holding ~90% market share," said Credit Suisse.
"Since then, an additional CSO wholesaler has been introduced, and DHL is increasing its presence with more manufacturers choosing to go direct. However, the market shares are still as concentrated, which would likely be a cause of concern for the ACCC."
What's more, the broker believes the acquisition won't be earnings accretive until FY22 despite API claiming that the transaction would be immediately earnings per share accretive.
Credit Suisse has an "underperform" recommendation on both stocks.
Citigroup is also not hopeful that the competition watchdog would approve the tie-up between the pharmaceutical companies even as it acknowledged that the industry has undergone significant changes since 2002.
"The ACCC appears to be increasingly unpredictable," said Citi. "It is hard to argue that this merger would not lessen competition however this is an unusual market – the Federal government sets drug prices and the drug distribution sector is highly regulated."
The broker has a reiterated its "hold" recommendation on Sigma with a price target of 54 cents per share.
The ACCC doesn't only pose a risk to API and Sigma. It had also flagged concern with the merger of TPG Telecom Ltd (ASX: TPM) and Vodafone Australia.
The news had sent the TPG share price and Telstra Corporation Ltd (ASX: TLS) share price plunging last week.
