In this briefing:
- API/Sigma Merger: Sigma Shareholders Need a Better Offer
- Softbank Corp, Takeda, and Newton’s Three Laws of Motion
- API Tilts at Sigma Healthcare: Expect More
- S&P 500 Revisiting 2,600 Support
- Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
1. API/Sigma Merger: Sigma Shareholders Need a Better Offer
Australian Pharma Indus (API AU), a pharmaceutical wholesaler, has lobbed an indicative cash-scrip proposal for its competitor, Sigma Healthcare (SIG AU). Under the proposal, Sigma shareholders would receive 0.31 API shares and A$0.23 cash for each Sigma share, implying $0.686 per Sigma share. If the proposal is successful, API/Sigma shareholders would own 63%/37% of the merged API-Sigma.
Unsurprisingly, API believes its proposal delivers fair value to both API and Sigma shareholders. However, our analysis suggests that Sigma shareholders need a bump for the bid to cross the finish line.
2. Softbank Corp, Takeda, and Newton’s Three Laws of Motion
It has been a huge Q4 for Japan capital markets and banking, and the result is some fat fees for global investment bankers on the Takeda/Shire deal, and a Softbank Corp IPO which I’d be totally OK not owning. A result of this activity is the fun in index land.
And there is a lot of fun to be had.
Some of that fun has been described in Softbank Corp IPO – Dividends, Index Buying, and Offer Structure. More was described in the various insights in the Takeda/Shire series, most recently in Takeda/Shire VI: Now For The Real Fun.
But it is worth revisiting because it involves, over the five weeks starting just before the Christmas holidays, across the two deals, probably…
US$35 billion of index flows…
Timing and impact is discussed herein.
3. API Tilts at Sigma Healthcare: Expect More
Friday morning, wholesale and retail pharmacy health/beauty and lifestyle products operator Australian Pharmaceutical Industries (API AU) announced that it had become a substantial shareholder in wholesale and retail pharmacy health/beauty and lifestyle products operator Sigma Healthcare Ltd (SIG AU) by purchasing 137.26mm shares. Roughly 52.5mm of those shares were purchased between A$0.53 and A$0.63/share between 5 September (the day before the half-year report came out) and 10 October and the other ~84.8mm shares were purchased Thursday 13 December at A$0.64, bringing the total position to 12.95%.
It turns out that on 11 October, API made an indicative non-binding proposal to Sigma through a Scheme of Arrangement whereby Sigma shareholders would receive 0.31 shares of API and A$0.23 in cash for each share of Sigma held.
That offer is now made public.
Worth A$0.686 per Sigma share as of announcement, the Indicative Proposal comes at a 69% premium to the close of trading on 13 December and a 46.8% premium to the one-month average. It is, however, a 10% premium to where API was buying shares on market in September and October. API shares were up a further 8+% on Friday, lifting terms further.
Sigma traded up 43% Friday to A$0.58 against terms which are now ~A$0.723, so there is still 24.7% upside to terms and there might be further upside on further synergy bullishness.
The Scheme Proposal is based on publicly available information, is subject to a number of conditions precedent, ACCC approval, due diligence, and confirmation of what they see as cost synergies.
This deal is somewhat opportunistic after recent troubles at Sigma, and I expect the ongoing strategic review at Sigma (assisted by Accenture) will come out saying that on a standalone basis after fixing itself up it is worth more than where it has been trading. The question is whether a merger would accelerate both the internal efforts at Sigma and improve competitiveness through cost synergies.
Allan Gray was the seller of the 8% stake yesterday it appears. The CIO is quoted in the API announcement as saying they support consolidation in the pharmaceutical wholesaling sector and are “positively disposed to efforts to expedite this consolidation.” They support it to such an extent that they decided to cut in half their participation in the economics of such efforts at expediting this consolidation.
First time indicative opportunistic offers in Australia can be an arbitrageurs’ graveyard.
4. S&P 500 Revisiting 2,600 Support
The S&P 500 was not able to break through the 2,817 and 100-day moving average resistance levels last week, and has now fallen abruptly back to test 2,600 support. For now our outlook remains cautious and we continue to expect heightened volatility and horizontal consolidation between the aforementioned support and resistance levels. Absent any real clarity in regards to Fed policy or U.S.-China trade relations, the S&P 500 is vulnerable to a breakdown. We highlight opportunities within Pharmaceuticals and Waste Services, two areas of the market with defensive characteristics that currently exhibit timely technicals.
5. Celltrion / Celltrion Healthcare Pair Trade: Ratio Should Move in Favor of Healthcare
- I initiated a pair trade (short Celltrion / long Healthcare) on Oct 22. Yield peaked at 16.66% on Nov 22. It now stays at 8.75%.
- The ongoing FSS investigation is hammering both. Healthcare is hurting a bit more because it is more directly exposed. The market is overreacting to it. Given what has happened to Samsung Biologics Co., (207940 KS), it is very unlikely that this will be a serious risk.
- I’d hold onto this position longer to regain a mid-teen yield. Current ratio is slightly above 20D MA, but still below yearly median.
- Healthcare’s KOSPI move is still lurking. Temasek’s Healthcare selling was done lately. Celltrion merger is also rising to the surface. We have more factors pushing up the ratio in favor of Healthcare.
