This article first appeared in The Edge Malaysia Weekly on July 31, 2023 - August 6, 2023

7-Eleven Malaysia Holdings Bhd is getting out of the retail pharmaceutical business when interest rates are at their highest since the pandemic and asset valuations are coming down to saner levels due to the rising cost of funds.

On July 21, 7-Eleven sold its 75% stake in Caring Pharmacy Group Bhd to another large pharmaceutical retail chain, BIG Pharmacy Healthcare Sdn Bhd, for RM637.5 million. The deal valued Caring, without its Indonesian business, at RM850 million.

The transaction represents a handsome premium for 7-Eleven if compared to the amount the company forked out to take Caring private in 2020.

In the privatisation, which was completed during the pandemic, 7-Eleven, together with Motivasi Optima Sdn Bhd (MOSB), valued the entire Caring at RM566 million.

Caring also had a strong balance sheet with net cash of RM108 million at the point of privatisation. However, its profits were low, hovering at RM25.7 million on a turnover of RM599 million. Caring’s valuation at the time it was taken private was a price-earnings ratio (PER) of about 21 times.

BIG Pharmacy is acquiring Caring’s Malaysian business from 7-Eleven at a PER of 19.6 times Caring’s profit at end-December 2022, which came up to RM43.4 million.

Although the valuation is lower, 7-Eleven does not lose out as it would have benefited from Caring’s dividend payout of RM40 million in the first quarter of the year. Caring’s net cash position is down to RM19.7 million, which suggests that shareholders probably benefited from the dividends in the last two years.

Moreover, Caring’s Indonesian business is still with 7-Eleven and MOSB.

As for BIG Pharmacy, it will have its hands full drawing synergy from the acquisition. The company is owned by its founders — Lee Meng Chuan and Lim Sin Yin — together with private equity firm Creador.

The transaction consolidates BIG Pharmacy’s position in the retail pharmaceutical space. Caring was easily one of its close competitors.

Whether the purchase pays off will only be known in a few years down the road, where a possible listing cannot be discounted.

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