Sigma's shareholders face tough choices

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It is not surprising that Sigma Pharmaceuticals’ shareholders are angling for a rejection of Aspen Pharmacare’s new and lower bid for the Australian drug company. At 55 cents per share, the offer is 5 cents lower than Aspen’s first proposal and half the value of Sigma’s share price 12 months ago, meaning investors are looking at substantial losses.

Unfortunately for those investors, the fact that Sigma’s current share price, 45 cents, remains substantially below even the lower bid reflects little confidence in an improved offer emerging and doubts that the deal is going to go through at all. However, this always looked to be the case (Aspen bid for Sigma not a sure bet, May 21, 2010). So although investors will be disappointed 55 cents might be as good as they are going get; the alternative, if Aspen walks away, is likely to be even greater losses.

Weak position

Aspen’s new offer, delivered after conducting due diligence, values Sigma at A$648m ($552m), 8% lower than the previous bid.

Either the South African drug company found even more to worry about in the books or figured that in the absence of a strong board of directors and a weak negotiating position, Sigma is hardly in a position to play tough.

Still, Aspen will be under huge pressure, and rightly so, from its own shareholders to not overpay. Sigma is heavily indebted, carrying A$785m on its balance sheet, and only last week once again wrote down the value of its generics business and warned that market conditions would continue to be tough for another couple of years.

Despite tough conditions in the Australian generic market the attractions of Sigma are clear – a strong distribution network with a quarter of the domestic market, which would play into Aspen’s expansion ambitions. However the extraordinary list of conditions that Aspen has imposed on its new offer points to extreme caution, which some have attributed to waning enthusiasm for the deal. The company has insisted on 10 clauses that must be met if it is to proceed with the bid, some reports have claimed, including no material decline in Sigma’s businesses, extended exclusive due diligence and a large break fee.

Expected rejection

Sigma is expected to reject this offer in the coming days, and is no doubt at the moment sounding out just how supportive its large institutional shareholders are feeling. With sales last year of A$2.66bn, protests from some quarters that this offer substantially undervalues the company and its prospects do not appear completely unfounded, even when considering market conditions and debt burden.

Press reports in Australia have suggested that other potential bidders are circling, and by rebuffing Aspen and walking away from the exclusive diligence period, Sigma can try to firm up these approaches.

However, the problem for any deal is likely to be that the right price for any acquirer’s owners is likely to look a lot different from the price in the minds of Sigma’s shareholders. Meaning long suffering investors face a Hobson’s choice – either 55 cents a share or a long, hard and lonely road to recovery.

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