Commonly asked Questions regarding the proposed CDC

Commonly asked Questions regarding the proposed
CDC - PWL Central merger
Here are some common questions you may have, it is a good place to look if you
have a question about the merger.
Who are the Merger parties
CDC Pharmaceuticals Limited (CDC) is a co-operative wholesaler of pharmaceutical products
to pharmacy and hospitals. CDC has its roots in Christchurch where it has been serving
pharmacy since 1927. In 2001 a large North Island facility was established in Lower Hutt catering
for the greater Wellington region and in 2012 CDC acquired SMP in Dunedin which extended the
supply to pharmacy and included wholesaling to veterinary clinics. CDC is the wholesaler of
choice in the South Island, with a significant share of the Wellington market as well as customers
as far north as Auckland. CDC also supplies hospitals throughout New Zealand with a
substantial share of the private hospital market.
Pharmacy Wholesalers (Central) Limited (PWL) is also a co-operative wholesaler of
pharmaceutical products to pharmacy and hospitals. PWL has been operating in New Zealand
since 1978 when it was incorporated as Pharmacy Wholesalers (Taranaki) Ltd. It amalgamated
with Pharmacy Wholesalers (Hawkes Bay) in 1995 becoming Pharmacy Wholesalers (Central)
Ltd and in 2000 a further amalgamation saw Medi-Group Ltd (a small wholesaler of
pharmaceutical products) in Wanganui added. PWL now supplies Pharmacy and Hospitals
throughout the Central North Island from warehouses in New Plymouth, Wanganui and Napier.
Both CDC and PWL are co-operative wholesalers, owned by their shareholder members. Both
share a customer focus, prioritising excellence in customer service, top “in stock” availability,
with dedicated and experienced staff resulting in superior financial returns for the co-operative
members.
Merger process
Q. What is the merger?
The merger, or amalgamation, is a statutory process under the Companies Act, which allows two
companies to join their business and continue as one combined entity.
Q. Who decides that the companies will merge?
The Shareholders of CDC and PWL Central will decide. The merger must be approved by 75%
of the Shareholders of both co-operatives, who attended (either in person or by proxy) and vote
at the relevant Shareholder meetings.
Q. What is the timetable for the merger?
If approved by Shareholders, the goal is to complete the merger on 1st September 2014;
however this could be earlier or later as it is subject to Commerce Commission clearance.
Q. What will happen if the Shareholders do not approve the merger?
The two businesses will carry on as they are now.
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Q. How long have CDC and PWL Central been discussing merger plans?
Discussions about working more closely together have been on-going for more than 18
months. However formal merger discussions began early in 2013 with an Establishment
Committee guiding the process.
Q. Are the two Boards unanimous in supporting the merger?
The Boards both unanimously endorsed the merger being placed before Shareholders. All
current Board members of both companies recommend Shareholders vote in favour.
Governance
Q. How was the proposal to merge progressed?
CDC and PWL jointly appointed an Establishment Committee to work on the merger. The
Establishment Committee has 6 members, comprising three directors from each of CDC and
PWL plus the CEOs of each company. The establishment Committee members are Gwynn
Thomson (Chair ), Jeff Lucas (Deputy Chair),Garry Brown, Paul Giles, Graeme Platt, Mike
Riordan, plus Mike Rhodes and Warren Davis
Q. Why did you appoint an Establishment Committee?
Best practice suggests that an Establishment Committee, selected by each co-op board, works
to develop the business case and nominates a CEO designate charged with achieving this plan.
This is to ensure those involved in the merger process remain to guide the new organisation
through its initial period after the merger.
Q. How many directors will there be and how will future boards be appointed?
At the two special meetings being held for shareholders to vote on the merger, shareholders will
also be asked to appoint the directors for the newly merged company. Initially, the
recommendation is the board comprises the current CDC directors (Gwynn Thomson, Garry
Brown, Paul Giles, Carolyn Oakley-Brown, Doug Stanton) plus the PWL directors Jeff Lucas,
Graeme Platt and Mike Riordan. Going forward, the new constitution sets out details for the new
normal AGM voting procedures. Also, it is proposed that regional representation will be provided
by the establishment of pharmacy advisory committees made up of shareholder representatives
and will include board representation.
About the new merged co-operative Company
Q. What will the new co-op be called?
The name of the new company will be CDC Pharmaceuticals Ltd. However the PWL Central
brand will continue on as is for the foreseeable future.
Q. Where will the new Head Office be?
The Head office will be in Christchurch.
Q. Who will be the CEO of the merged organisation?
The current CEO of CDC, Mike Rhodes has been appointed CEO designate of the
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merged organisation.
Q. What will happen to the current CEO of PWL Central, Warren Davis
Warren has accepted the position of North Island General Manager designate with the merged
organisation and will remain based in New Plymouth
Q. Will there be any changes to the warehouses?
No, there will be no warehouse closures as a result of the merger. Shareholders and Members
will continue to enjoy the relationships and levels of service that they have with their
warehouses now. No consideration of amalgamating warehouse facilities will occur for at
least three years.
Q. What will a merger mean for customers?
The intent is that this merger will appear seamless to our members with the prospect of
continued great services as a merged entity. Members should not experience any initial changes
at any of our branches New Zealand wide.
Q. What will a merger mean for Shareholders?
We believe the effect will be extremely positive for all Shareholders as a result of the increased
scale of the merged entity. The merger provides the opportunity to improve services and benefits
to our membership through a stronger relationship with suppliers and increased business
opportunities. A greater member base also enables us to compete more effectively with growing
competition and buffer the ongoing impact Pharmac’s actions have on margins within the
industry.
Q. What will be the effect on Suppliers?
Relationships with our suppliers and business partners will continue as usual. We believe there will
be enhanced opportunities for our supplier partners in future as a result of the increased scale
and reach of the merged entity.
Q. Will the increased scale require additional funding – has this been secured?
CDC and PWL Central have common funding requirements and the projections for a merged
entity have been scoped and confirmed by CDC’s bankers ( BNZ).
Q. How will you deal with different IT and other systems?
CDC are already moving to a new IT platform over the coming year. This platform is scalable
and, under a merger plan, synergistic (less expensive than upgrading both companies systems
as stand-alone systems) and can be carried out with less operational risk. In the meantime both
PWL and CDC systems will continue to operate.
Q. What if Members do not stay loyal to a merged entity and we lose business?
This is an ever-present risk regardless of a merger or not. We have to remain competitive to
ensure we earn and retain customers’ loyalty. It is one of the compelling reasons for the merger
– to provide increased benefits to members.
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Q. How many staff will lose their jobs?
No staff will lose their jobs as part of the merger, so there will be no job losses in the warehouses
and nothing will change for our members and their branches. There will be some changes long
term at the administrative level as we streamline back office facilities and reduce costs through
economies of scale and the use of a centralised IT system.
Business case for merger
Q. What is the case for a merger based on?
A review of strategic options for each company indicated a merger was the best option. We then
explored this in detail by examining whether Shareholders would benefit under a merger
proposal – and the analysis showed, through economies of scale and long term security, this to
be the case.
Q. How did you prepare the business case?
This was led by the CEOs of both companies with the help of some of the management teams.
We looked at how performances and services could be improved and at the risks and
opportunities facing the industry and the companies. These merger benefits were then debated
with the Establishment Committee, which includes significant governance and business
experience.
Q. As well as opportunities, did you consider downside risk?
Yes, the Establishment Committee’s due diligence process carefully considered the risks to
both businesses. The biggest single risk is a poorly implemented merger so that benefits are not
realised. That is why a lot of work has already been done on composition of an Establishment
Committee and ways to ensure the merger is well-executed.
Q. Is it not less risky to stay as we are?
No, the status quo carries risk also. Consolidation (e.g. Green Cross Health, formerly
PharmacyBrands Life, Unichem, Amcal, Care Chemist and Radius brands) is occuring in our
industry not only among our competitors but also among suppliers and manufacturers. Green
Cross Health has also been purchasing pharmacies which reduces our ability to compete equally
for the business. Our evaluation of strategic options showed that there exists risk with the status
quo, and that a merger is a better option.
The hospital business is also significant for both companies and could become at risk in the
future through the consolidated logistical initiatives by the DHBs lessening the ability of the
existing companies to offer and provide competitive logistical alternatives if they stay as they are.
Q. Why are there not financial forecasts in the shareholder pack?
Neither co-op has publicly-traded shares, nor have they traditionally published forecasts or
market guidance. In particular we need to be careful about our commercial competitiveness detailed forecasts provides valuable information to our competitors. Our legal advisors have
confirmed this approach.
Financial forecasts are sometimes included if a company is looking at raising new capital from
the public – this is not the case here. They may also do this to justify an offer valuation. Again this
is not the case here as each shareholder's $1 share will still be worth $1 post merger, such is the
nature of a co-operative.
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The key question is whether Shareholders will benefit under a merger, and this is the
focus of the information and analysis we have provided. We have concentrated on the
possible synergies over and above the usual performance of the current standalone
businesses. That is, the synergy benefits sit on top of the underlying co-ops’ expected
performance.
Q. Who made the assessments of the synergy benefits?
The gains from scale and national distribution, and the back office and IT savings, were
assessed by the management teams of CDC and PWL and debated amongst the Establishment
Committee members.
Q. Why can we not gain these synergies on our own?
Merger gains come from back office and IT efficiencies, having the size to improve IT systems to
better manage stock, warehouses, customers and suppliers, and from having the scale to
negotiate possible better deals. The synergy analysis identifies benefits over-and-above what
each coop might achieve on a standalone basis – in other words benefits we can access together
but not as individual co-ops. These operational benefits could not be achieved on a standalone
basis.
Terms of Trade and Share structure
Q. What is happening with the share structures?
PWL Shareholders: For PWL shareholders, your $1 nominal value Ordinary share in PWL now
become a $1 nominal value Ordinary share in CDC. You (and each CDC Shareholder) will have
a maximum of 250 votes in the Amalgamated Company (subject to you making minimum
purchases each financial year as described in the Information Pack).
CDC Shareholders: For CDC shareholders we have consolidated the two classes of shares
(Ordinary and Preference Shares) into a single class of Ordinary shares. These shares have a
nominal value of $1 each and in order to achieve that we first have to convert your existing
Ordinary shares (value 10cents each) to $1 shares and then convert the $1 Preference shares
into $1 Ordinary shares. The end result is you still have the same dollar value of shares, but they
are all one class being $1 nominal value Ordinary shares
For example: XYZ Pharmacy currently holds
400 10cent Ordinary shares
$40
24,000 $1 Preference A shares
$24,000
Total value of shareholding (Ordinary and Preference)
$24,040
400 10cent Ordinary shares convert to 40 $1 Ordinary shares
24,000 $1 Preference A shares convert to $1 Ordinary Shares
Post merger total value of Ordinary shareholding
$40
$24,000
$24,040
Q. Why is it proposed that the current preference shares within CDC will convert to
ordinary shares.
CDC currently has an Ordinary Share class, which recognises membership in the co-operative.
CDC also has Preference A Shares which are held in proportion to a members' purchases with
CDC. There is no commercial justification to have these 2 share classes. Accordingly, in the
merged company, Ordinary Shares will be issued based on the level of purchases which
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members have with the company. To recognise the co-operative nature of the company,
Shareholders will have voting rights so long as they transact a minimum number of purchases
with the company. However, no Shareholder will have more than 250 votes.
PWL currently has just one class of shares being Ordinary shares.
These shares will be converted on a 1:1 basis for Ordinary Shares in CDC.
The overall resulting Share structure is more transparent and administratively easier.
Q. Why is CDC doing a Bonus Share Issue as part of the merger?
The independent valuation of each company (performed by BDO) determined that this bonus
issue to CDC shareholders is required to ensure each shareholder group (CDC and PWL)
retains their relative share of the historical value built up in each co-op, at the time of the merger.
The bonus share issue ensures CDC Shareholders are not disadvantaged by the change to the
shareholding requirement.
Q. How are the number of Bonus Issue shares calculated.
The shareholding in the new company needed to be in the proportion of 78% for current CDC
shareholders and 22% for current PWL shareholders to reflect the independent valuation
performed by BDO. In order to achieve the 78%, CDC’s board determined there should be a
bonus issue to current shareholders to bring the value of issued shares to the required level. The
board further agreed that in keeping with the Co-operative nature of CDC, the fairest method was
to issue these share equally among the current shareholders of CDC.
Q. Why are the Bonus issue shares to CDC shareholders called Ordinary B Shares?
It was important to distinguish these shares from the ordinary shares (and the old preference
shares) which are held in relation to your purchasing level. The Ordinary B shares (bonus
shares) will be dividend bearing and can be redeemed (repurchased by CDC) when you sell your
buisness or upon retirement. However, to ensure that CDC members holding Ordinary B
Shares do not get a disproportionate number of votes, Ordinary B Shares do not have voting
rights.
Q. Why do non trading shareholders have to sell their shares back to the Company?
It is a requirement of the merger the Shareholders will have the right to vote for this as part of the
merger process. Going forward it is considered that only transacting customers can become
shareholders of the merged cooperative company, which is consistent with the principles of a
co-operative.
Q. Are my existing normal trading terms going to change?
Initially the newly merged company will retain the existing terms of trade each member currently
enjoys. Once the new IT platform referred to above is bedded in the company will look at the
opportunities and benefits for members of moving to a single set of terms of trade.
Professional Advisors
Q. Who are your Advisors on this proposal?
BDO Christchurch Limited to determine valuations for each of CDC and PWL and
evaluate fairness to each group of Shareholders.
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Anthony Harper for general legal advice, procedures and Commerce Commission
matters.
Q. Are your advisors being paid fees to make the merger happen?
Our advisors have been engaged on standard commercial terms for their various roles.
However, no component of their fees are linked to the outcome of the merger vote.
How to vote
Q. What happens if I have not received an information pack or voting
forms?
CDC shareholders please call Mike Rhodes at CDC on 03 359 3970 and PWL
shareholders should contact Warren Davis at PWL Central on 06 757 3061
Proxy forms can be emailed to you with a link to the website for the rest of the information or, if
necessary a replacement pack can be resent. Of course you can find all the information about
the proposal in the members section of the websites
www.cdc.co.nz or
www.pwlcentral.co.nz

If mailing a Proxy form please place in the reply paid envelope and send to:
PWL Central , P O Box 105, New Plymouth 4340, or
CDC Pharmaceuticals, P O Box14036, Orchard Road, Christchurch 8544

Proxy forms can be faxed to:
PWL Central +64 6 757 9963
CDC +64 3 359 5971

Proxy forms can be scanned and emailed to:
PWL: [email protected]
CDC: [email protected]
please put the words " Proxy Form" in the subject line for easy identification
Q. How can Shareholders vote?

In person at the two special meetings,
PWL Members: 7:00PM Tuesday 29th July 2014, at the Plymouth Hotel, New
Plymouth.
CDC Members: 7:00PM Tuesday 29th July 2014, at CDC function room , Christchurch.

If a Shareholder is unable to attend the meeting and wishes to appoint a proxy or a
corporate representative they will need to complete and sign the Proxy Form and
complete the Voting Instructions, and lodge it with the individual company by no later
than 5:00pm on Sunday 27th July 2014 for your vote to count.
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
It is very important that Shareholders vote – either at these meetings in person or
by proxy.
Q. When does proxy voting close?
Sunday 27th July 2014, 5.00pm (48 hours before the meeting)
Q. Why is it important as a Shareholder that I vote?
This is an important decision for CDC and PWL Central , and the decision about whether or not
to proceed with this merger rests with you, the Shareholders. It requires 75% of each of
CDC's and PWL's shareholders attending the meetings (personally or by proxy) to vote in
favour of the resolution, for it to go through. It is an important decision for CDC and PWL
Central. So, please, take a look at the information about the merger and place your vote either
at the special meetings or by sending in your proxies.
Q. Where can I find out more information?
All the documentation relating to the merger can be found at www.cdc.co.nz and
www.pwlcentral.co.nz in the members section.
Q. If I want to talk to someone, who can I talk to?
Any of the members
the merger.
Gwynn Thomson
Jeff Lucas
Gary Brown
Paul Giles
Graeme Platt
Mike Riordan
of the Establishment Committee are happy to talk to shareholders about
027 228 8058 (CDC Chairman)
027 249 4449 (PWL Chairman)
027 243 0620 (CDC Director)
04 567 7277 (CDC Director)
021 405 098 (PWLDirector)
021 244 2277 (PWL Director)
The CEO’s of each company are also available to discuss the merger:
Mike Rhodes (CDC CEO) 03 359 3972 or 027 201 1693
Warren Davis (PWL CEO) 06 757 3060 or 027 444 1847
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