Australia’s competition regulator has raised a raft of red flags over Sigma Healthcare’s proposed $8.8 billion tie-up with Chemist Warehouse that is set to catapult the private retailer onto the Australian Securities Exchange.
Its biggest fear is that the mega-merger would raise barriers to rivals expanding their footprint or entering the pharmacy market which may lessen competition.
It also worries it would reduce competition in pharmacy retailing by removing the price pressure Chemist Warehouse and Sigma’s banner stores impose on each other.
The Australian Competition and Consumer Commission’s report on Thursday followed a three-month long review.
“This is a major structural change for the pharmacy sector, involving the largest pharmacy chain by revenue merging with a key wholesaler to thousands of independent pharmacies that in turn compete against Chemist Warehouse,” commissioner Stephen Ridgeway said.
“We have identified a range of preliminary competition concerns, including at the retail level and as a result of the proposed integration of the merged firm across the wholesale and retail level. We want to hear from interested parties, including rival pharmacies as we continue this review.”
The ACCC said if given the green light, the deal would create a company that is “uniquely vertically integrated across multiple levels of the pharmacy supply chain” which could ultimately reduce competition.
Sigma already provides brand and support services to community pharmacies operating as franchisees under Sigma banners such as Amcal +, Discount Drug Stores, PharmaSave and Guardian.
Chemist Warehouse is a franchisor of pharmacies and retail stores under the brands Chemist Warehouse, MyChemist, Ultra Beauty, My Beauty Spot, and Optometrist Warehouse. It is also a wholesaler and distributor, and provides brand and support services to its franchisee pharmacies.
The watchdog raised concerns that the proposed acquisition may harm pharmacies currently supplied by Sigma, given it is incentivised to maximise wholesale sales. After the transaction, the independent pharmacies it supplies would also be competitors to Chemist Warehouse.
“In particular, we are focused on how the newly merged company may have the ability and incentive to favour Chemist Warehouse stores or worsen terms to non-Chemist Warehouse banner stores, raising their costs and rendering them less competitive,” Mr Ridgeway said.
It also flagged issues with the use of commercially sensitive data relating to pharmacies supplied by Sigma, in a way that damages competition. It said independent pharmacies currently have three main choices for wholesale supply, and banner, franchise arrangements, but given the potential data concerns and risk of competitive harm, the effective options for some pharmacies may reduce to two.”
The watchdog said it had heard concerns about the impact Chemist Warehouse has had on the pharmacy sector but its focus would remain only on what affect the merger could have on competition.
“The key issue is whether or not the proposed acquisition weakens competition in the supply of pharmaceutical products,” Mr Ridgeway said.
The ACCC said it was yet to reach a final view on the merger and has called for submissions by June 27.
Sigma chair Michael Sammells told the company’s annual general meeting late last month he was hopeful of a “positive decision” from the ACCC.
But in the event the proposed merger and backdoor listing onto the ASX does not proceed, he said retention of key skills, expertise and corporate knowledge would be critical in driving a standalone Sigma to continue to diversify the business, grow its margins, and identify and execute alternative strategic transactions.
Sigma previously forecast synergies of $60 million a year after the first four years of the combined group.