Could this be a fly in the ointment for Woolworths’ (ASX:WOW) push into healthcare?

Woolworths could find that its API takeover attempt has some roadblocks.

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Woolworths Group Ltd (ASX: WOW) wants to buy the Australian Pharmaceutical Industries Ltd (ASX: API) business. But there could be some roadblocks for that deal.

Woolworths has come in with a bid of $1.75 per API share, which is a 12.9% premium compared to the price that was agreed with Wesfarmers Ltd (ASX: WES).

The supermarket business said it was willing to explore potential alternative control transaction structure options, such as a takeover bid with a minimum acceptance condition of 50.1%. Woolworths noted that the board of API has determined the proposal is, or is reasonably likely to be, a superior proposal.

The CEO of Woolworths, Brad Banducci, said:

There is a compelling strategic rationale to support Woolworths Group’s acquisition of API. Health and wellness is a large, fast-growing category and API would be a fantastic addition to our food and everyday needs ecosystem.

If successful, we will continue to support API’s community pharmacy partners to deliver better experiences for both customers and pharmacists. We will also work to strengthen API’s wholesale and distribution business to ensure that all Australians continue to have timely, cost-effective access to a full range of PBS and other medicine, via their community pharmacy, regardless of where they live.

Woolworths also said it expects to achieve material shared benefits and synergies from the combination if it went ahead.

What’s the problem with the takeover?

As reported by my colleague Brooke Cooper, the Pharmacy Guild of Australia is not enthusiastic about the deal. The Pharmacy Guild said:

Why is a company with interests in the alcohol, tobacco, gambling, and nightclub industries wanting to move into healthcare?

How does it hope to convince Australians that it is serious about their health and welfare?

How will it ensure the successful community pharmacy model, which is custodian of the PBS (Pharmaceutical Benefits Scheme), is protected and maintained?

Analysts agree that it could be harder for Woolworths to get its offer across the line compared to Wesfarmers.

The Australian Financial Review reported that UBS analyst Shaun Cousins could face a lot of scrutiny because of the overlap between pharmacy sales and the and the health and beauty products that are sold by Woolworths. Whilst Mr Cousins thinks the deal could be approved by the ACCC, it could take time. He said that the Pharmacy Guild concerns looks greater for Woolworths than Wesfarmers.

Craig Woolford, a MST Marquee analyst, was also quoted by the newspaper, who said that a Woolworths deal is “likely to make the influential Pharmacy Guild nervous.”

Jefferies analyst Michael Simotas said that Wesfarmers could come back with a higher bid and that the ACCC could also have concerns as well. The AFR reported he said synergies should be bigger for Woolworths, but Wesfarmers had a better track record of executing in non-food retail categories.

Time will tell whether Wesfarmers comes back with an improved bid and which retail giant is ultimately successful at expanding into the pharmacy space.

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Motley Fool contributor Tristan Harrison 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 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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