The Sigma Healthcare Ltd (ASX: SIG) share price plunged 12.3% on the ASX yesterday to lead the ASX losses after the company provided an update on the proposal it received from Australian Pharmaceuticals Industries (ASX: API) in December 2018.
The Board of Directors has decided the API proposal is not in the best interests of Sigma shareholders, and the share price plummeted on the news, falling to $0.535 per share – its lowest level since early December 2018.
What did management say in the update?
Management stated that since January 2019, API and Sigma have engaged in a limited form of due diligence focused on the synergy and regulatory workstreams which included mutual sharing of high-level information through virtual data rooms and in-person due diligence sessions. The due diligence confirmed a sound basis for $60 million per annum run-rate synergies assumption, largely due to supply chain consolidation to Sigma-owned warehouses.
On 4 March 2019, Sigma received a letter from API reconfirming its non-binding indicative proposal on essentially the same terms as the indicative proposal received from API on 11 October 2018. This initial bid was for API to acquire Sigma, via a Scheme of Arrangement, for 0.31 API shares plus $0.23 cents in cash for each Sigma share held.
Management also said the outcome of its Sigma standalone business review has identified cost efficiencies of over $100 million that are deliverable by Sigma as a standalone business in the next 18-24 months, separate from the $60 million of synergies identified.
As a result of the above, the Board of Sigma has concluded that the API Proposal is not in the best interests of Sigma shareholders and will not recommend entering into the Scheme of Arrangement.
So where to now for Sigma?
These mergers and acquisitions tend to have a little bit of cat-and-mouse about them, and I wouldn’t be surprised if this is simply a tactic by the Sigma Board to bring API back to the table with a juicier offer.
Having said that, betting on M&A approvals is risky business given the regulatory and anti-competition hurdles that need to be cleared even once the Board and shareholders have approved any deal. While management believes they can target significant cost savings in the next 18-24 months, I’d be wary given Sigma’s profitability and potential growth outlook.
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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.