Deal delivers bitter pill to some shareholders

The value of listed cosmetics seller Beauty Direct plunged yesterday as shareholders baulked at plans for a $38.4 million acquisition of the Life Pharmacy chain.

At one point, Beauty Direct shares shed a fifth of their value as it emerged a 591 million share issue at 6.5c each would be undertaken to secure a 49 per cent stake in the 21-store pharmacy chain.

Beauty Direct shareholders face having their ownership diluted. They will own just 4.5 per cent of the changed company, which will be re-named Life Pharmacy. The share price closed 15 per cent lower at 12.9c yesterday.

With a 24 per cent stake in the company, Bronwen Evans, who runs the Beauty Direct online store, will see her stake diluted to about 1 per cent. Gordon Ritson, a 26 per cent owner, also faces dilution.

Evans said she was comfortable owning a tiny share of a company with much better prospects.

"I've been working towards this for three years," she said.

The backdoor listing by Life Pharmacy continues the run of small-cap listings. Electronics retailer Eastern Hi-Fi is undertaking an initial public offering and tapware maker Methven wants to raise $35 million in a public float.

Life Pharmacy had considered undertaking its own sharemarket listing, but the company's chief executive, Tim Roper, said the presence of Ritson on the board sparked off negotiations about joining forces.

For its shares, Beauty Direct gets a half-share in a national chain of franchised pharmacies with annual turnover of about $115 million.

Roper said pharmacy chains faced consolidation and the listing would give Life Pharmacy the potential to fund further expansion.

"I believe the market is too small for five or six groups. Strategic alliances are what will emerge in future," he said.

Life Pharmacy already shares office space with Pharmacy Brands, which runs the Unichem chain of pharmacies.

There are 10 major shareholders in Life Pharmacy with franchise holders owning 51 per cent stakes in their own stores and receiving 51 per cent of the profits derived from them.

They become the major new shareholders in the company and will not be able to sell their shares for two years.

Four franchisees declined to join the group but they have the option to join in later - on new terms.

Roper said Life Pharmacy planned to pay out 60 per cent of earnings to shareholders.

The acquisition price includes a $3.5 million provision that will be payable based on the financial performance of the pharmacies.

Beauty Direct plans to undertake a one-for-20 share consolidation if the deal goes through.

There is also a 10-year standing arrangement allowing the remaining 51 per cent of Life Pharmacy to be bought on the same terms.

"There's the option for the remaining 51 per cent to be purchased if pharmacy ownership deregulates totally," said Roper.

Regulatory changes that came about in September loosening up pharmacy ownership rules had allowed the deal to get off the ground.

With 21 existing stores, Life Pharmacy had 30 stores in its sights, with three sites in development.

The Beauty Direct online operation will continue.

There was also the possibility of introducing another pharmacy brand, said Roper.

"It could be part of a growth strategy we've yet to develop."

Life Pharmacy would elect a new board chaired by Ebos and Skellmax board member Liz Coutts.

The deal is subject to shareholder, stock exchange and Takeovers Panel approval and also needs the granting of licences for each store by Medsafe.

An independent report will be compiled and a shareholder meeting is planned for December 23.