Sigma and CWG Merger Risks and Management Overview
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Key Risks
-
Risks that are Common to Both Sigma and CWG
Key Risk
CWG is currently working to
determine an acceptable
form of franchise agreement
for use in NSW which will
support approvals by the
NSW pharmacy regulator
Inadequate or poor liquidity
management or failure to
raise funding when required
Loss of a material customer
or customer group or
customer default
Summary
The following relates to CWG only.
NSW has the most restrictive laws in Australia relating to pharmacy ownership. The NSW laws are broadly expressed, of uncertain scope and subject to differing interpretations. To date, CWG
franchisees in New South Wales which have required an approval have been unable to obtain such approval from the New South Wales regulator based on CWG's standard suite of franchise and related
documents (which apply elsewhere in Australia). Instead they have needed to base approvals on alternative agreements, which do not reflect the desired arrangements between CWG and the relevant
franchisee.
If CWG continues to be unable to identify a form of pro forma franchise agreement and related documents which delivers an optimal and mutually-acceptable commercial outcome for both CWG and the
franchisee, and which will reliably support timely approvals in NSW, franchisees may be impacted by rejections or delayed approvals, and CWG and its pharmacy customers may need to enter into sub-
optimal arrangements in NSW in order for the relevant pharmacy to secure an approval, which may impact the Merger Party's operations.
Effective liquidity management is imperative to meet the Merger Parties' ongoing funding requirements, manage working capital and execute their overall individual business strategies. Poor or inefficient
management of its liquidity risk could adversely affect a Merger Party's operations and financial performance.
In the future, a Merger Party may require new or additional debt facilities (and it is proposed that Sigma will fund the cash consideration payable under the Proposed Merger from a substantial new debt
facility as described on page 29 of this Presentation). A Merger Party's ability to secure funding at the appropriate time will depend on the amount of funding required, the performance and future
prospects of its business, and a number of other factors prevailing at that time (e.g. interest rates, and economic and debt market conditions). There is no assurance that the required funding will be
secured at all or on acceptable terms and in the timeframe required, which may constrain the relevant Merger Party's business operations (for example by preventing investment in growth or to respond
to competitive pressures).
Other potential risks to a Merger Party associated with financing arrangements include breaching debt covenants, incurring increased borrowing costs (for example, if interest rates rise) or not being able
to meet financial commitments when they fall due, as well as the detrimental financial impact on their business from the sub-optimal use of capital and the potential adverse reputational impact from
suppliers or creditors.
In addition, poor liquidity management may impact upon a Merger Party's strategic flexibility - for example, the Merger Party's ability to execute on its strategic goals by taking advantage of favourable
opportunities as they arise, or its ability to adapt to changing market conditions, invest in innovation, or pivot in response to competitive pressures. This lack of strategic flexibility can hinder long-term
growth and competitiveness.
There s a risk that a Merger Party may lose a material individual customer or material customer group, which could negatively impact that Merger Party's revenue, result in a lower customer base for the
Merger Party's retail and healthcare programs, lead to weaker buying power from a decrease in volume of product purchased, and a significant change to revenue scale could mean the Merger Party
may be unable to support its fixed cost base. An individual customer or a buying group may default in a payment to a Merger Party or suffer an insolvency event. This could lead to a negative working
capital impact due to overdue debts and increased borrowing costs and increased legal and debt recovery costs. Any of these could have a material adverse effect on a Merger Party's operations or
financial performance.
Both Merger Parties are parties to a number of contracts and agreements with a broad range of suppliers and service providers. Some contract counterparties have a right to terminate contracts in certain
circumstances, including where a change of control provision is triggered or where the Merger Party is in material breach of the contract. In addition, some contracts contain a right for the counterparty to
terminate for convenience at any time during the contract terms. Some of the Merger Parties' material contracts are undocumented, have expired or will expire in the next 12 months and there is a risk
that a Merger Party will not be able to renew them on favourable terms or at all.
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