Today’s surprise announcement that Woolworths (ASX: WOW) was planning to abandon its $850m Australian Pharmaceutical Industries (ASX: API) bid seems to have fallen on deaf ears this morning with the supermarket giant’s shares trading neither up nor down at the open.
Early December Woolworths management worked hard to sell what it regarded as a compelling strategic argument for supporting its proposed acquisition of API, owner of the Priceline chemist chain.
However, the supermarket chain has now withdrawn its $1.75 non-binding proposal to acquire 100% of shares in API on the grounds that it unable to “validate the financial returns it requires in line with the Group’s capital allocation framework”.
Unsurprisingly, shares in Wesfarmers (ASX: WES) were up around 1.57% in early morning trade as investors now realise that the door for the rival bidder is now wide open for the conglomerate to seize control of API.
Wesfarmers, which owns 19.3% of API made a $1.55-a-share bid for the company in September last year. It was a counter bid by Woolworths early December at $1.75 per share which saw both companies enter into a fierce tussle to take the chemist chain out.
Removal of the Woolworths offer for API follows a failed attempt by a third bidder, Sigma Healthcare (ASX: SIG).
The pharmacy wholesaler/retailer withdrew its proposal to merge with API early November following heavy criticism from its biggest shareholder, Allan Gray, over what the fund manager believed to be poor allocation of capital.
Meantime, API has reiterated that the scheme implementation deed with Wesfarmers “remains in place and is on track for completion in the first quarter of calendar year 2022”.
The withdrawal of Woolworths’ $1.75 offer had a material impact on the API share price this morning with the chemist chain down around 12.60% at lunch.
Interestingly, as of yesterday, API shareholders would have understandably been expecting Wesfarmers to sweeten its offer, given that the opening price ($1.73) represented a substantial premium to the conglomerate’s $1.55 offer.
However, as this morning’s announcement graphically attest, a day can be a long time on the share market, and short of any other bidders, it’s now back-to-reality-time for API shareholders.
Consensus on API is Hold.
Based on Morningstar’s fair value of $1.78 (4 January 2022), now API appears to be undervalued.
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