South Africa's Aspen to buy drug business of Australia's Sigma $804 million

Acquisition would give Aspen control of about a quarter of Australia's generic drugs market

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VICTORIA, Australia—SigmaPharmaceuticals may finally be purchased by South Africa-based AspenPharmacare. Well, sort of. In actuality, while Aspen had originallyintended to purchase the entire Australian company, it has now agreedto buy just the drug-making arm of Sigma, for approximately $804million. What is interesting is that while Aspen would be gettingless than it originally intended, it is paying more, as it hadoriginally proposed to acquire Sigma in its entirely for somewhereover $625 million.
Several market watchers, though, thinkthis may still be a good deal for Aspen, in part because it will giveAspen control of around 25 percent of Australia's generic drugsmarket.

As noted by Sigma's largest singleshareholder, Orbis Investment Management, the decision to leave Sigmawith its drug distribution and pharmacy business and for Aspen totake the pharmaceutical manufacturing business that it truly covetedmakes sense for Sigma investors.

"I think it's a good price,"said Simon Marais, chief investment officer at Orbis, which owns 9.25percent of Sigma, in an interview with Reuters. "Could they haveturned the [drugs] business around? There's a chance, but this takesall the risk out of the thing, and it leaves a huge margin of safetyfor current investors."

The deal isn't final yet, as Sigmaplans to put the deal to a shareholder vote probably at the end ofOctober, and there have been rumors of other suitors for Sigma'sgenerics business, as well as its orphan drugs arm and itsover-the-counter analgesic and vitamin business.

So, David Arter, an analyst at brokerWilson HTM, says the current price tag may simply "get the ballrolling" and, if the transaction goes ahead as planned, "it'slikely to force the hand of any other potential suitors." Arterthinks that a more fair price for the company would probably be morein the $840 million range or so.

But in the absence of any aggressivesuitors, Sigma won't be in a position to argue the point with Aspen,likely, since it suffered a large writedown earlier this year fromits generic drugs business because of tough competition and hasissued two profit warnings since then, along with pressure fromlenders to sell some or all of its assets. It has also faced threatsof a class-action lawsuit by shareholders.

And coming out with something might bebest for the company long-term, as the company's chairman, BrianJamieson, has pointed out that a sale to Aspen would exceed Sigma'sdebt and put it in a position to grow again. "Sigma will emergeafter the sale in a financially powerful position for future growthand business improvement under the company's new management team, ledby Mark Hooper," he says.

Should the deal go through, Durban,South Africa-based Aspen says it be the biggest acquisition ofoverseas assets by an African company in the past three years. Aspenexpects that taking over Sigma's drug-making operation will lead tocost savings and allow the company to introduce its own generic andover-the-counter products in Australia.

"We think Aspen more likely than notgot a good deal," says David Low, a healthcare analyst at DeutscheBank AG in Sydney. "They've taken on some risk with generics, buta number of the other parts of the business have solid earnings andan attractive outlook."

Aspen CEO Stephen Saad says that thedeal would be earnings-neutral in the first year and told Reutersthat "from year two we should see a nice kicker as we start toharness some of those synergies. It's a nice platform to be able todrive our generics business through."

Saad also sees an Australian presenceas an entry point to wider Asia-Pacific market penetration, into suchplaces as Japan, Taiwan, Thailand and the Philippines, he said.

Even just looking at the Australianmarket, some analysts thing there is much to be gained by Aspen increating synegies between it's existing company and Sigma's assets.As Grant Lowton, an analyst at Kagiso Securities in Johannesburg,noted: "There is a definitely potential for growth in Australia'sgeneric market."

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