Beauty Direct to Acquire Life Pharmacy
November 24 2004
Beauty Direct to Acquire Life Pharmacy
Beauty Direct and Online Limited (NZX: BDO) today announced that it has entered into a series of acquisition agreements to establish what will be New Zealand’s first listed pharmacy group.
Proposed terms of the Acquisitions
Under the agreements, and subject to Beauty Direct shareholder approval, Beauty Direct acquires the business assets of Life Pharmacy Limited (“LPL”), including the Life Pharmacy brand, and a 49 per cent shareholding in 17 pharmacy companies (together “the Acquisitions”). These companies contain 17 of the 21 Life Pharmacy stores operating throughout New Zealand and one Unichem store, with underlying turnover of approximately $95 million per year.
Consideration will be for a total price of up to $38.4 million settled by the issue of up to 591 million Beauty Direct ordinary shares at a value of 6.5 cents each. The total purchase price includes an ‘at risk’ amount of approximately $3.5 million (or up to 54.4 million Beauty Direct shares) to be issued to the pharmacy owners subject to the pharmacy companies meeting certain financial targets in the future. At the completion of the Acquisitions, and subject to shareholder approval, Beauty Direct will change its name to Life Pharmacy Limited, consolidate its share capital on a 1 for 20 basis and appoint new directors to the Board.
The Acquisitions are subject to a number of conditions including:
the approval of the Acquisitions and related proposals by the shareholders of Beauty Direct;
the Company obtaining all necessary approvals, exemptions and waivers from NZX and the Takeovers Panel;
the granting of pharmacy licences by MedSafe in respect of the change in ownership of the pharmacy companies;
the completion of shareholder agreements, franchise and service agreements, management agreements and the adoption of a new constitution by the pharmacy companies; and
a minimum of 15 pharmacy companies satisfying the conditions.
Once the Acquisitions have been settled in full, current Beauty Direct shareholders will own around 4.5 per cent of the enlarged company, with LPL and a reasonably large number of individual pharmacy owners owning the remainder.
The company has sought a waiver from NZX regarding spread requirements. In addition, and subject to an NZX waiver being obtained, the pharmacy owners are restricted for two years from selling 50 per cent of the Beauty Direct shares they are to receive as consideration for the 49 per cent interests in their individual pharmacies. Under the transaction Beauty Direct also gets a 10 year option to go to 100 per cent ownership of each of the pharmacy companies it has acquired 49 per cent of, should law changes allow.
Description of Life Pharmacy
The Life Pharmacy brand and concept was established in 1995 to create a retail offering that was readily differentiated from existing pharmacy chains. There are 21 Life Pharmacies operating under franchise agreements throughout New Zealand.
The retail positioning of Life Pharmacy is based upon superior store design and fitout, co-ordinated branding and marketing strategy, strong focus on premium cosmetic and fragrance ranges and retail locations in major shopping malls or retail centres. In aggregate, the 21 Life Pharmacy stores generate annual turnover in excess of $115 million.
Deregulation Opportunity Life Pharmacy Limited will be New Zealand’s first listed pharmacy group, as the transaction takes advantage of new regulations in the Health Practitioners Competence Assurance Act and the Medicines Amendment Act 2003, which came into effect on September 18 2004. Under these regulations pharmacists can now own up to five pharmacies (previously only one), non-pharmacists can own up to 49 per cent of a pharmacy (previously 25 per cent) and there is no limit to the number of pharmacies they can invest in (previously only one).
Rationale for the Acquisitions The Acquisitions form the basis of the business strategy that will enable the Company to achieve operational and financial efficiencies that were not achievable when the individual pharmacies operated as standalone entities in the regulated environment. The opportunity exists to further align purchasing, pricing, marketing and promotion, accounting, banking, stock management, IT and staff training functions to take advantage of the aggregated size of the Life Pharmacy businesses.
Shareholding in the individual pharmacies is balanced between the pharmacist shareholder (51 per cent) and the Company (49 per cent). This, in conjunction with a high dividend payout ratio, ensures that both shareholders and the pharmacist owners stand to benefit from improvements to the financial performance of the individual pharmacies.
The Acquisitions represent the first step in a growth strategy for the Company. The Directors will continue to assess investment or franchising opportunities for the Life Pharmacy brand based upon strong retail sales, a prime retail location and demonstrable management expertise on the part of pharmacy owners.
Proposed Changes to the Board of Beauty Direct
Liz Coutts will become Chair of the new company. Ms Coutts is a professional director with over 10 years of experience on the boards of publicly listed companies. She is currently on the board of listed companies Ebos and Skellmax and was previously a board member of Pharmac, the crown entity which manages government expenditure on pharmaceutical subsidies.
Andrew Davidson, former CEO of Woolworths Limited and former Deputy Director of Westfield NZ Limited, will become an independent director. BDO Director, Mr Gordon Ritson, will remain on the Board. Mark Vuksich and Neil Webber, current Life Pharmacy Directors, will complete the Board at this stage, with a further independent director to be added later.
Life Pharmacy CEO, Tim Roper, joins the board and will become CEO of the new entity. He was previously CEO of Unichem Chemists, from 1990 to 2003.
Commenting on the announcement, Bronwen Evans, founder of Beauty Direct, said, “I am delighted to be able to put this transaction before our shareholders. I view this as an excellent progression of my vision for the company of expansion into significant physical retail. As well as providing prescription and over the counter medicine supplies, Life Pharmacy is one of New Zealand’s largest retailers of premium branded cosmetics.”
New Chair, Liz Coutts said, “Previous regulations constrained ownership, investment participation and enhancement of the industry. The new regulations have created an opportunity to introduce a new sector to the market, increase shareholder value and attract new investment through a national organisation. Life Pharmacy, with a broad geographic spread, excellent locations in high traffic retail environments and stocking a range of high quality brands, is well-placed to address that opportunity.”
Life Pharmacy CEO, Tim Roper said, “Life Pharmacy, as an organisation, has been planning for this since its formation in 1995. Our aim was always to end up as a listed company. We considered an Initial Public Offering, but when Beauty Direct opened discussions with us, we quickly saw the fit and opportunity. Beauty Direct’s shareholding in the pharmacies leaves us with an ownership structure that fits comfortably within our industry and our expectations.”
Other executives from Life Pharmacy will take on senior management roles within the listed entity. Life Pharmacy operates stores in the following locations: Auckland (10 stores), Hamilton (2), Bay of Plenty (3), Wellington (3) and Christchurch (3). Full details of the acquisition will be detailed in the Notice of Meeting and Information Memorandum to be circulated in due course.