Good evening,

All eyes are on Australia’s competition regulator which last month outlined its concerns that the $8.8 billion Chemist Warehouse merger – pushed by David Di Pilla’s HMC Capital, a major Sigma shareholder – would lessen competition in the pharmacy market.

In all, it raised five “orange” flags, with many brokers suggesting this could easily be remedied by selling off some of the stores.

One of the few analysts who have been bearish on the merger proposal are those at Wickhams Hill, a small Singaporean hedge fund run by two Australians. Even before the ACCC’s preliminary views were published, they accused “the smart money” of playing “dumb in the hope of not drawing attention to a dramatic change in the competitive landscape”.

In their latest research note, circulated to clients and obtained by Street Talk, Wickhams Hill, which specialises in special situations and unusual capital structures, is doubling down. They say there appears to be no remedy for the ACCC’s concerns about the merger with Sigma except for the divestment of “problematic Chemist Warehouse stores”.

And that, they suggest, may unsettle Chemist Warehouse partners – many of whom are shareholders given the company’s unique structure.

“If forced to choose, the path of least resistance for [Chemist Warehouse] executive is likely to opt for a traditional IPO rather than forced divestiture of related party interests,” write Wickhams Hill analysts Lloyd Moffatt and Jordan Green. “It’s unclear that proposed undertakings can address ACCC concerns while remaining appealing to Chemist Warehouse shareholders compared to staying unlisted or pursuing an IPO.”

Wickhams Hill pays special attention to analysts at Barrenjoey, who told clients that the regulator may have ignored a major wholesaler when it warned that smaller pharmacies may have fewer independent suppliers to choose from should Chemist Warehouse be allowed to merge with Sigma.

Barrenjoey’s Tom Kierath said CH2 – Clifford Hallam Healthcare – appeared not to be included in the calculations of the wholesale retail pharmacy supply chain when the ACCC initially reviewed the transaction.

Moffatt and Green are not so sure: “A cursory read of the ACCC’s publicly released statement of issues would have demonstrated that the ACCC had, in fact, considered CH2 in forming its preliminary views.”

Read the full story tomorrow and more on the Street Talk page.

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