The McPherson's Ltd (ASX: MCP) share price is having a very strong day.
In morning trade, the health, wellness and beauty products company's shares are up almost 15% to $1.02.
Why is the McPherson's share price surging higher?
The catalyst for the rise in the McPherson's share price has been the announcement of an agreement with pharmacy giant Chemist Warehouse Group.
According to the release, the two parties have agreed to establish a unique strategic alliance which has been structured to deliver material commercial and operational benefits to McPherson's.
As part of the agreement, McPherson's will be appointed as Chemist Warehouse's exclusive long-term distributor of a select portfolio of Chemist Warehouse-owned or controlled health and beauty brands outside of the Chemist Warehouse Network in Australia and New Zealand.
The range, which includes Wagner Vitamins, Wagner Body Science, Bondi Protein, Foster Grant, INC and Microgenics, will be made available to all customers within the McPherson's distribution network for an initial term of five-years commencing on 1 July 2022.
In addition, Chemist Warehouse will increase the portfolio of McPherson's brands it currently ranges in Australia and New Zealand, to include Moosehead, Maseur, Fusion Health, Stratton, Sugar Baby and Happy Flora. The pharmacy giant will also recognise McPherson's as a preferred supplier, allowing the company to enjoy the benefits of that status.
What's the catch?
Chemist Warehouse isn't doing this out of generosity. It will come at a cost to McPherson's.
McPherson's is essentially giving away almost 10% of the company to Chemist Warehouse in exchange for these agreements.
The release notes that the company will issue approximately 14.1 million McPherson's shares to Chemist Warehouse on 1 July 2022, making the pharmacy chain a substantial shareholder with an interest of 9.9% on a fully diluted basis.
Despite the dilution caused by the material share issue, management expects the agreement to be earnings per share accretive in FY 2023. This is based on agreed sales targets.
Time will tell if that is the case.
