Wesfarmers share price: where next following $687m takeover bid?

The last few weeks have been full of takeover bids, announcements and skirmishes.

Wesfarmers (ASX: WES) is the latest company to join that club, on Monday announcing that it had made a non-binding, indicative takeover bid to acquire 100% of Australian Pharmaceutical Industries (ASX: API), for $1.38 per share.

The all-cash offer values API at $687 million, a substantial premium to where the company traded last week.

Company snapshot: Founded over a century ago in 1910, API represents Australia's leading pharmaceuticals company, responsible for the distribution, retailing and manufacturing of a variety of health and wellbeing products. The company owns and operates some of Australia's most recognisable health retailers, including Priceline Pharmacy and Soul Pattinson Chemist.

Despite its leading status in Australia, the stock has been volatile over the last year, bouncing around a number of pronounced peaks and troughs in that period. Indeed, prior to today’s open, the stock was down ~5% over the last six months.

Of course, with Westfarmers’ bid representing a ~21% premium to where API traded at last Friday, it should come as little surprise that the stock surged on Monday. Here, API opened at $1.35 per share, just a shade below the takeover offer price, as the market calibrated the stock’s new reality.

By comparison, Wesfarmers investors responded with little enthusiasm, with the stock opening just above where it closed on Friday.

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Rallying support

Wesfarmers said it was looking for support from API's Board, hoping that they would endorse the takeover offer and tell API shareholders to do the same.

Mind you Wesfarmers already has significant support for the acquisition, with the company noting that Washington H. Soul Pattinson – which owns 19.3% of API, had ‘agreed to vote in favour of the Proposal and has granted a call option in respect of its API shares in favour of Wesfarmers.'

Beyond getting the green-light from shareholders, the takeover would require a variety of other approvals, including approval from the ACCC.

The ACCC has currently turned its attention to scrutinising the $22 billion takeover offer for Sydney Airport, with the AFR reporting that the regulator would take ‘an extremely close’ look at that deal. We discuss the Sydney Airport takeover situation in more depth here.

Why acquire API at all?

Speaking to the rationale behind the takeover play, Wesfarmers MD Rob Scott said:

'The combination of Wesfarmers and API is a compelling opportunity to capitalise on API's strengths and positioning in these markets while drawing upon Wesfarmers' capabilities in retail and distribution, our strong balance sheet and our willingness to invest in our businesses for growth over the long term.'

In addition to that, it was noted that if and once the acquisition was finalised, 'API would form the basis of a new healthcare division of Wesfarmers'

Wesfarmers said it would use existing cash reserves and debt facilities to complete the deal.