The Wesfarmers Ltd (ASX: WES) and Woolworths Group Ltd (ASX: WOW) rivalry has been reignited today after Woolworths lobbed a $1.75 per share offer for Australian Pharmaceutical Industries Ltd (ASX: API).
Previously, Wesfarmers had made a binding offer of $1.55 per share for the pharmacy chain, which had been recommended by the API board.
The deal looked largely complete until today’s shock announcement.
Wesfarmers and Woolworths were formerly fierce competitors in the supermarket sector before Wesfarmer’s spun off Coles Group Ltd
(ASX: COL) in 2018.
Battle for API heats up
Woolworths $1.75 per share cash offer via a scheme of arrangement values the Priceline Pharmacy chain owner at $872 million.
It’s a 20 cents per share or a 12.9% premium to Wesfarmers $1.55 per share proposal on November 8.
Woolworths’s bid is still subject to due diligence, which it believes will take four weeks.
On that timeline, a binding offer would be expected by mid-January 2022.
Woolworths deal is subject to regulatory approval, a unanimous recommendation by the API board and an Independent Expert concluding the bid is in shareholders best interests.
Wesfarmers still holds the ace
Woolworths audacious bid for API still has one critical hurdle to jump through.
Wesfarmers bought a 19.3% stake in API, therefore it holds a substantial share of voting power against any other proposal, including Woolworths.
Subsequently, Woolworths would need to convince the remaining 80.7% of API’s shareholders to vote in its favour.
A scheme of arrangement requires at least 75% of shareholder votes. Therefore, the supermarket giant would need at least 92% of API’s shareholders on its side should Wesfarmers vote against the deal – no easy task.
Woolworths has said it’s open to exploring alternative control structures, such as a takeover bid with acceptance of just 50.1%.
Nonetheless, Wesfarmers won’t roll over easily given it’s already fended off a competing offer from Sigma Healthcare Ltd (ASX: SIG).
The conglomerate has the right to match Woolworths bid, which would make for a fierce standoff.
API response
The API board has allowed Woolworths to undertake due diligence as it believes the offer is superior to Wesfarmers:
“…the API Board considers that the Woolworths Proposal is reasonably capable of being valued, implemented and completed in accordance with its terms, and, if completed substantially in accordance with its terms, be more favourable to API shareholders as a whole than the Wesfarmers Scheme”
My take
In what is generally a quiet month for corporate Australia, Woolworths, Wesfarmers and its bankers will be working feverishly to win control for API.
I’d expect Wesfarmers to match the bid, and then force Woolworths to other raise or walk away.
Either way, the battle for API looks to be heating up again.
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