Why is the Wesfarmers (WES) share price higher?

Posted: 7 October 2021 2:06 pm
News
WES-Shares-07Oct_1800x1000_Finder

Shares in the conglomerate have risen nearly 20% over the last 12 months.

Following a strong year, shares in Wesfarmers (ASX: WES) have not had a great run recently. Since peaking in mid-August, the conglomerate has lost market value. But the stock bucked the trend on Thursday, rising nearly 1% to $54.57 at the time of writing.

Why has the WES stock price risen?

Investors seem to be cheering an announcement by the retail conglomerate on Thursday that it has acquired a 19.3% stake in Australian Pharmaceutical Industries (ASX: API), the owner of retail chain Priceline Pharmacy.

Wesfarmers has been locked in a takeover battle for API and last month lifted its offer price to $1.55 a share, valuing the target company at more than $760 million. Rival bidder Sigma Healthcare has a $1.57 a share offer on the table, which had been seen as more favourable by API’s board.

But Wesfarmers moved to acquire 95.1 million shares, a 19.3% stake, on Thursday morning from API’s major shareholder Washington H. Soul Pattinson, which has previously backed its bid.

Wesfarmers’ decision is being seen as a move to block the rival offer from Sigma and could turn the tide in its favour.

“Exercising our option to acquire 19.3% of API reflects the group’s commitment to the transaction and the continued progress of the Wesfarmers proposal,” Wesfarmers chief executive Rob Scott said in a statement.

Healthcare plans

The Kmart and Bunnings owner has been keen to expand into healthcare for some time, and has been adequately cashed up since divesting its coal mining operations and spinning off Coles over the last 2 years.

CEO Rob Scott has previously said the API takeover will enable Wesfarmers to “form the base” of a new healthcare division within its operations.

Analysts have backed that proposal as a strategic move to position the conglomerate for earnings growth in a post-COVID environment. They also believe the Australian competition regulator is not likely to approve Sigma’s plans to take over the API network, because it would lead to further consolidation in pharmacy distribution.

Meanwhile, analysts at Jefferies said in a note on Thursday that Wesfarmers' stake acquisition would make it very difficult for the Sigma proposal to succeed as it stands.

Investors seem to be backing that line too, with API shares jumping 2.3% to $1.54. Wesfarmers’ shares, which had lost 6.5% over the last month, have risen nearly 1% in early trading.

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