South Africa's Aspen Pharmacare will buy the drugs unit of Australia's Sigma Pharmaceuticals for $804 million in cash, having sweetened its offer to gain about a quarter of Australia's generic market. The bid from Aspen likely ends a three-month tussle between the two companies over the price of debt-laden Sigma.
Aspen, 19 percent owned by Britai's GlaxoSmithKline, said it would pay A$900 million ($804 million) for the unit, well above the A$648 million it previously offered for the entire company. Sigma, whose shares have been trading at about half what they were a year ago, had pressed Aspen to up that offer.
Instead of a full take-over, Aspen opted for the drugs manufacturing arm, the asset it coveted most, leaving Sigma with its drug distribution and pharmacy business. Sigma's shares jumped as much as 7 percent on the bid, before trimming some gains, as the deal moved it closer to resolving long-standing debt problems. Sigma's second-largest shareholder, Orbis Investment Management, gave the sale a thumbs-up.
"I think it's a good price," Simon Marais, chief investment officer at Orbis, which owns 9.25 percent of Sigma, told Reuters. "Could they have turned the (drugs) business around? There's a chance, but this takes all the risk out of the thing, and it leaves a huge margin of safety for current investors."
Aspen, which already has a minor presence in Australia, has been keen to boost its presence in the country and push further into fast-growing Asia. But analysts said the South African company would have an uphill battle with Sigma's generics business, which caused the Australian company to record an annual loss earlier this year. It also faces an uncertain regulatory environment in Australia, where the government is cutting drug subsidies.
"We believe, Aspen could have demanded a better price, given the earnings pressures facing Sigma's generics business and given the regulatory risk that exists in the Australian market," said Nino Frodema, a portfolio manager at Metropolitan Asset Managers.
Other suitors had been circling Sigma, looking at its generics business, as well as its Orphan specialty drugs arm and its Herron over-the-counter pain killers and vitamins business. Sigma hopes to put the deal to a shareholder vote at the end of October.
David Arter, an analyst at broker Wilson HTM, said the price tag appeared to be on the low side, estimating fair value in the mid-A$900 million range. Sigma, however, is in a weak bargaining position after taking a big writedown on its generic drugs business earlier this year due to tough competition, issuing two profit warnings since then, and facing pressure from its lenders to sell assets.
Sigma, advised by Lazard, said the sale to Aspen exceeded the group's debt and would position the company to grow again. Sigma's biggest shareholder, Lazard Asset Management, which has a 9.5 percent stake, declined to comment on Aspen's offer. "The only thing we would not want them to do at all is to use the money to go and buy things again. They've got to recognise that it is a smaller business now," he said. The group's long-time chief executive Elmo de Alwis is about to step down, while its chairman and chief financial officer has also quit.
Aspen, which is being advised by Investec, said it would fund the deal itself as well as from funds raised from its bankers. Shares of Sigma finished up 4 percent at A$0.52, after trimming some early gains. Volume spiked to 11.4 million shares, nearly a fifth more than the 90-day average. "They are going to have to work very hard to turn that business around."