Sigma share price: What's next with the Chemist Warehouse ASX listing?

What's next in this M&A saga?

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The Sigma Healthcare Ltd (ASX: SIG) share price remains in focus after its much-anticipated merger with Chemist Warehouse hit a major roadblock in the last week, putting a potential Chemist Warehouse ASX listing back on the agenda.

The Australian Competition and Consumer Commission (ACCC) raised its concerns about the merger in an announcement, where it questioned the deal's implications for independent pharmacies.

News of the ACCC's "preliminary concerns" caused the Sigma share price to drop sharply. It has now slipped around 5% in the last month to $1.19 per share at the time of publication.

Sigma share price hits turbulence

Sigma's share price has hit turbulence since the announcement last week. Investors appeared to have taken note of what was said.

The ACCC detailed several issues it had with the merger. For one, it said the transaction represents a "major structural change for the pharmacy sector."

Secondly, it wants to know if the merger could reduce competition and raise consumer prices. It says the combined entity would be "uniquely vertically integrated", with a large footprint across the wholesale and retail markets.

At the same time, the Commission also believes the merger could limit options for independent pharmacies and raise barriers for new competitors due to Chemist Warehouse's discounting strategies. For instance, Chemist Warehouse passes on full discounts on Pharmaceutical Benefits Scheme (PBS) prescriptions to its customers.

News of the ACCC's concerns last week hit the Sigma share price. Investors traded it down from $1.21 to $1.16 per share by market close on Friday. But they seemed to have shown renewed confidence on Monday, with Sigma up 3% at the time of publication.

Now analysts at investment bank Barrenjoey have claimed that The ACCC left a major player in the pharmacy supply chain out of its calculations when arguing against the merger.

It says Clifford Hallam Healthcare (CH2) was excluded from the equation and that CH2 is "increasing investment in capacity to grow its [market] share", per The Australian Financial Review.

Even if independent pharmacies decided they did not want to be supplied by the combined group, we think wholesale supply competition for this business would remain healthy

The firm also told its clients that factors like vertical integration are industry norms and that Chemist Warehouse "will be Sigma's largest wholesale customer" regardless of the outcome. This news is potentially positive for the Sigma share price.

Could an IPO be the solution?

In my view, both Sigma and Chemist Warehouse will likely work with the ACCC, but one can't rule out the ACCC blocking the transaction either.

And with the ACCC crawling all over the deal, many question whether an initial public offering (IPO) of Chemist Warehouse shares could be a viable option.

A lot of the heavy lifting has already been done, for one. Investors have also gained a far deeper understanding of Chemist Warehouse as well.

There is no saying what that means for the Sigma share price. But this groundwork could facilitate a quick move towards a public listing if the merger fails.

Foolish takeaway

The Sigma share price is in focus as the future of its merger with Chemist Warehouse remains uncertain. Investors are closely watching the ACCC's next moves.

Whether through a merger or an IPO, Chemist Warehouse's journey to the ASX has a ways to go yet.

Motley Fool contributor Zach Bristow 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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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