Australian Pharmaceutical (ASX:API) share price soars 18% on Wesfarmers bid

It is a busy day for Australian Pharmaceutical Industries…

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The Australian Pharmaceutical Industries Ltd (ASX: API) share price is trading higher this morning.

At the time of writing, the pharmacy operator's shares are up 18.34% to $1.36 apiece. Unfortunately for shareholders, Australian Pharmaceutical shares have underperformed the S&P/ASX 200 Index (ASX: XJO) by 18.5% over the past year.

Let's find out what's moving the API share price today.

What's moving API shares on the ASX?

Wesfarmers launches API offer

Shares in ASX-listed API are soaring in early trade this morning following a non-binding offer from Wesfarmers Ltd (ASX: WES). The offer is to acquire 100% of API's shares outstanding for $1.38 cash per share by way of a scheme for arrangement. This represents a 21% premium to the company's last close price of $1.145 per share on Friday.

Speaking on the announcement, Wesfarmers Managing Director Rob Scott said:

If the Proposal is successful, API would form the basis of a new healthcare division of Wesfarmers and a
base from which to invest and develop capabilities in the health and wellbeing sector. The combination of Wesfarmers and API is a compelling opportunity to capitalise on API's strengths and
positioning in these markets while drawing upon Wesfarmers' capabilities in retail and distribution, our strong
balance sheet and our willingness to invest in our businesses for growth over the long term.

API's major shareholder, Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) holds 19.3% of the total shares outstanding in the pharmacy chain. The investment company has elected in favour of the proposal and has granted a call option in respect of its API shares in favour of Wesfarmers.

The deal will remain subject to due diligence, entry into the deed, ACCC clearance, API board and shareholder approvals.

Review prompts refocus

In addition to the Wesfarmers bid, the company announced its decision to increase the focus of the company on its pharmacy distribution and two retail businesses, Priceline Pharmacy and Clear Skincare. The outcome follows the completion of a strategic review conducted by the company.

As a result, ASX-listed API plans to discontinue the manufacturing of personal care and over-the-counter products in New Zealand. In its place, the company will seek to outsource its manufacture.

Furthermore, the company anticipates by moving to outsourced contract manufacturing, a lower cost of goods will be generated, in addition to a more consistent product supply. API noted that both had been affected by COVID-related impacts.

Looking at the financial impact of the decision – a net effect of $24.5 million at the earnings before interest and tax level is expected. This will be a one-off charge that contains the carrying value of plant and equipment; inventory; employee; and make good costs. Additionally, the decision to cease manufacturing is estimated to contribute positive cash of $9.7 million in the current year.

API Chief Executive Officer and Managing Director, Richard Vincent said:

By simplifying our operations and focussing on our two retail-facing businesses it will allow us to escalate our investment in our digital capabilities and accelerate the initiatives that will improve our customer experience in both our Priceline Pharmacy and Clear Skincare networks.

Mr Vincent also outlined that more details would be shared at API's ASX Investor Day.

Lockdowns lead to forecast revision

In this morning's announcement the pharmacy chain operator made known the impact of recent lockdowns. The lockdowns of June and July have resulted in the temporary closure of 72% of the non-pharmacy company-owned Priceline stores, and 75% of the Clear Skincare clinic network.

As a result, API's previous forecast of $75 million in full-year underlying EBIT has been revised. Although, on a positive note the company was on track to achieve this number prior to the latest COVID implications.

Regarding the new forecast, Mr Vincent said:

On the basis that there is a relaxation of the existing COVID-19 restrictions in place including New South Wales by the end of July 2021 and no new restrictions between now and our financial year end on 31 August 2021, API now expects its full year underlying EBIT to be circa $66 million to $68 million, and its reported EBIT to be in the range of $31 million to $33 million (unaudited). In the event that the restrictions remain in their current form beyond the end of July the impact is a reduction of approximately $1 million in EBIT per week of extension.

Lastly, API revealed to the ASX its new Marsden Park distribution centre in North-West Sydney remains on time and within budget.

Motley Fool contributor Mitchell Lawler has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Washington H. Soul Pattinson and Company Limited and Wesfarmers Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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