What will happen to the Sigma share price after the Chemist Warehouse merger?

Morgan Stanley analysts explain the default factor that will support the Sigma share price after the merger.

| More on:
The last piece of the jigsaw being fitted, indicating good news for a share price on merger or acquisition

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Bronwyn Allen 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.

More on Healthcare Shares

A man looking at his laptop and thinking.
Earnings Results

CSL shares push higher despite 'mixed result with headline misses'

There were positives and negatives in the company's first half performance.

Read more »

Scientists working in the laboratory and examining results.
Earnings Results

CSL share price on watch amid $2.1b half year profit and dividend hike

Let's see how this biotech giant performed during the first half of FY 2025.

Read more »

Two lab workers fist pump each other.
Healthcare Shares

Guess which ASX 300 healthcare stock just rocketed 20% on BIG earnings growth

Investors are piling into the ASX 300 healthcare stock on Monday. But why?

Read more »

Health professional putting on gloves.
Earnings Results

Why this ASX 200 share is soaring in Monday's sinking market

The ASX 200 share is shrugging off the broader market fall today to rocket higher. But why?

Read more »

Three Archer Materials scientists wearing white coats and blue gloves dance together in their lab after making a discovery
Healthcare Shares

Why is the Sigma share price soaring 6%?

Sigma has upgraded its FY25 guidance ahead of the anticipated Chemist Warehouse merger completion.

Read more »

Stethoscope with a piggy bank and hundred dollar notes.
Healthcare Shares

Which ASX 200 healthcare share will pay the best dividend yield in 2025?

Earnings season is underway and dividend announcements are on investors' minds.

Read more »

A person is weighed down by a huge stack of coins, they have received a big dividend payout.
Dividend Investing

Looking to bag the record high ResMed dividend? You better hurry!

Unlike the majority of ASX 200 income stocks, ResMed pays dividends every quarter.

Read more »

Two lab workers fist pump each other.
Healthcare Shares

3 reasons to buy CSL shares today

Two investment experts expect a big turnaround for CSL shares in 2025.

Read more »