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Chemist Warehouse goes public. Should you buy shares in the new venture?

Peter Switzer
12 December 2023

Chemist Warehouse has been a retail success of gargantuan proportions, and this private company is set to go public by buying/merging with the listed company Sigma Healthcare. This merging will make its founders, Mario Verrocchi as well as Jack and Sam Gance, even richer than they already are.

The combined value of Sigma plus Chemist Warehouse will be $8.8 billion. Current CEO Verrocchio says the 600 stores they have now is only the start of something bigger!

The plan is to take Chemist Warehouse worldwide and be a new Boots or Walgreens, which means they’ll be looking for other people’s money (or shareholders) to help bankroll their 100-year growth dream.

The AFR’s Carrie LaFrenz says the Sigma deal will deliver to the existing shareholders a $700 million pay day, but the founders will keep 50% of the new-merged company.

Sigma is a wholesaler of pharmaceuticals, but it also owns a chain of chemists including Amcal+, Discount Drug Store and Guardian.

Verrocchi told the AFR that their 100-year plan breaks down into:

  1. The first 30 years you do what you have to do on your own patch.
  2. This newly merged company takes Chemist Warehouse to the world.
  3. The younger generation then completes the dream.

This isn’t a bad effort for two chemists i.e. the Gance Brothers, who got together in 1972 in Melbourne and then were joined by Verrocchi in 1980. Their first branded business was in 1997 with MyChemist, followed by the first Chemist Warehouse in 2000.

In reality, the business has already started its international expansion being in New Zealand, China and Ireland with sales over $7.9 million.

Why has it succeeded? Well, the entrepreneurial drive of the Gances and Verrocchi has been critical, but their warehouse model and deep discounting resulted in them making 70% of their money from front of shop sales, while the average chemist shop only makes 27% out of selling aftershave, band aids, hair spray, etc.

The AFR explained how Sigma will participate in the merger: “On Monday, Sigma told investors that it would raise $400 million as part of the merger, underwritten by Goldman Sachs, and its chief executive, Vikesh Ramsunder, will run the overall group. Sigma chairman Michael Sammells will also keep his position. Under the deal, Sigma will buy 100 per cent of Chemist Warehouse’s shares.”

But be clear on this, this is Chemist Warehouse swallowing up Sigma, with their shareholders ending up with 15.25% of the new and improved company.

Verrocchi will own 22.3% of the company, Jack 12.9%, Sam 12.75% and other Chemist Warehouse shareholders will have 36.8%, with this latter figure showing what can be the pay day when friends ask you to invest in their business dreams!

The big shareholders have to keep their shares until August 2025, but other shareholders can take the money and run whenever they like. The merger won’t be completed until the second half of next year.

So, should you buy into this deal by buying Sigma shares?

All share buying is a gamble. On one hand, Chemist Warehouse has a great track record and people use this business religiously. However, the merging of two companies can deliver lower costs and bigger revenue but it can also bring culture problems.

Sigma is a public company and as such behaves differently to an entrepreneur-run private company.

While Verrocchi will be chief executive, often big institutions that invest in the new Sigma business with Chemist Warehouse added in, mightn’t like the way he does business.

Also, what existing Chemist Warehouse shareholders might do when they can cash out could hurt Sigma’s share price.

I believe their business model will work over time, but there could be some bedding down problems before the real value of this merger shows up in the share price.

That said, the race to buy into the long-term future of the new and improved Sigma could send its share price surging higher.

As I said, share buying is a gamble.

 

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© 2006-2021 Switzer. All Rights Reserved. Australian Financial Services Licence Number 286531. 
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