The Sigma Healthcare Ltd (ASX: SIG) share price is trading at $2.89 on Thursday, up 1.05%.
The company was the No. 1 stock for price growth among ASX 200 healthcare shares in 2024.
The Sigma share price ripped 162% higher to close at $2.62 on 31 December. By comparison, the S&P/ASX 200 Index (ASX: XJO) rose by 7.49%, and the S&P/ASX 200 Health Care Index (ASX: XHJ) lifted by 6.01%.
Sigma owns a network of chemists, including Amcal, Discount Drug Stores, and Guardian Pharmacy. Its big price surge last year was due to excitement over its proposed mega-merger with the privately owned Chemist Warehouse pharmaceutical chain.
Sigma shares had a market capitalisation of $800 million at the time of the merger announcement on 11 December 2023. Astounding share price growth has increased that market cap to $4.66 billion today.
Sigma hopes that the merger will be finalised early next month.
What will happen to the Sigma share price?
Morgan Stanley analysts say the merged company, which will be much larger than Sigma is today, will benefit enormously from passive index investors once it begins trading.
According to the Australian Financial Review (AFR), Morgan Stanley analysts estimate that Sigma's share weight in the S&P/ASX 200 Index (ASX: XJO) could climb 50 basis points after the merger. This would generate $537 million worth of trades from ASX 200 index funds and exchange-traded funds (ETFs).
Passive investing through ETFs is rising in popularity. According to ETF provider BetaShares, almost $250 billion is invested in almost 400 ETFs listed on the ASX and CBOE.
The biggest ETF on the market, worth $17.69 billion, is the Vanguard Australian Shares Index ETF (ASX: VAS), which tracks the performance of the S&P/ASX 300 Index (ASX: XKO). There are also several ETFs that track the benchmark ASX 200.
Passive investing is the default factor that will immediately support the Sigma share price post-merger.
This is because most ETFs track market cap-weighted indexes, which means they buy more shares in larger companies by default.
Morgan Stanley equity strategist Antony Conte explains:
We estimate the additional size would drive significant passive demand.
We will also likely observe subsequent flow across existing members, namely across the larger members as the index weights recalibrate to account for Sigma's additional size.
What's next?
The Australian Competition & Consumer Commission (ACCC) green-lighted the merger in November.
The next step is a Sigma shareholders vote on 29 January, after which Chemist Warehouse shareholders will need to approve the scheme of arrangement. Then it's a matter of waiting for final court approval and sign-off.
The indicative date for implementation of the transaction is 12 February.
The Sigma board has unanimously recommended the deal to shareholders.
In Sigma's notice of the meeting to vote, chair Michael Sammells said:
This transformational opportunity will bring together two highly complementary businesses including Australia's leading retail pharmacy franchisor and a dynamic and efficient pharmaceutical wholesale operation.
