WES commits to the health, wellbeing and beauty sector
It took the CEO, Rob “they’re not browsing” Scott, a little over nine weeks to arrive at the conclusion that if Wesfarmers (ASX:WES) are serious about using Australian Pharmaceutical Industries (ASX:API) as a springboard to enter the growing health, wellbeing and beauty sector, then its logical to increase the acquisition price.
Yesterday, Wesfarmers did just that with the announcement they will now pay $1.55 per API share, a 12.3 per cent increase on the original $1.38. This $88.5 million increase on the original $687 million non-binding, indicative offer to acquire API is a rounding error for Wesfarmers, which has a market capitalisation of $64 billion.
API’s revenue of $4 billion covers a portfolio of pharmacy distribution ($3 billion or 75 per cent of total revenue) including the Priceline Pharmacy chain (474 – however it is important to note register sales made by franchisees do not form part of API’s results), as well as health and beauty retail including the Clear Skincare beauty network (67 account for $42 million of revenue).
The first challenge for Wesfarmers will be to try and drive higher margins from the $3 billion pharmacy distribution division.
The second priority will be to make sensible bolt-on acquisitions to ensure this new division becomes somewhat relevant to the company over the medium-term.
And there are lots of businesses – both listed and unlisted – that will come into focus for Rob Scott and his team. Sigma Pharmaceuticals (ASX:SIG) (market capitalisation of $662 million at the current $0.62 share price), for example, reported EBIT of $63 million on revenue of $3.4 billion for the year to January 2021. And like API, its share price performance over recent years has been underwhelming.
Another company which may come onto the Wesfarmers menu down the track is BWX Limited (market capitalisation of $775 million at the current $4.87 share price). BWX recently announced a 3 per cent increase in revenue for the year to June 2021 to $194 million, and a 12 per cent boost in Earnings Before Interest and Tax to $34.5 million.
CEO Dave Fenlon is excited by the future trajectory of several of BWX’s brands including Sukin, Andalou Naturals and Mineral Fusion. In addition, BWX has recently secured 50.1 per cent of Go-to Skincare for around $89m, a business founded by Zoe Foster Blake in 2014.
You can read my last article on Wesfarmers here: Wesfarmers to enter the “pharmacy distribution plus health, wellbeing and beauty” sector
The Montgomery Funds owns shares in Wesfarmers. This article was prepared 16 September 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Wesfarmers you should seek financial advice.