China's Laobaixing and Yixintang Pharmaceutical Group Co Ltd are in advanced talks to create the country's biggest drugstore chain via a share swap, three people familiar with the matter said.
Laobaixing's founders, Xie Zilong and Chen Xiulan, are expected to have a bigger stake in the merged firm than Yixintang's founder Ruan Hongxian, said two of the people.
Shanghai-listed Laobaixing, formally known as LBX Pharmacy Chain Joint Stock Company and which boasts Tencent Holdings Ltd as a backer, has a market value of around $4.4 billion, while Shenzhen-listed Yixintang is valued at about $3.5 billion.
The talks have been ongoing for more than three months, the two people said. One person said the firms are aiming to finalise the deal in the coming days, adding that Laobaixing would remain the listed entity.
After the story was published, Yixintang said in a filing late on Monday that the report about the company being in talks with Laobaixing to create China's largest pharmacy chain was untrue. Yixintang has nothing to disclose at this stage, it said in the filing.
Laobaixing did not respond to requests for comment.
The sources declined to be identified as the discussions were not public.
Shares in both firms initially climbed on the news of the merger talks but later gave up gains to be mostly flat in afternoon trade.
Tencent, which took a 1% stake in Laobaixing to become a strategic partner this year, has endorsed the merger and is planning to work with the combined firm to speed up implementation of a "smart retail" strategy, according to two people.
The tech giant is looking at helping with the integration of their online and physical store businesses and will help drive traffic through its messaging service WeChat as well as other platforms, said one person.
Tencent declined to comment.
Laobaixing, also backed by private equity firms FountainVest Partners and Primavera Capital, had 6.7 billion yuan ($1 billion) in revenue for the first half of the year, while Yixintang had 6 billion yuan, filings show.
Together they exceeded the 8.6 billion yuan in first-half sales for current industry leader, state-backed Sinopharm Holding Guoda Drugstores. Their combined number of stores at around 13,100 would also be more than double Guoda's.
China's drugstore market is, however, highly fragmented. According to market research firm Qianzhan, Guoda had a market share of 2.9% last year, ahead of Laobaixing with 2.6% and Yixintang with 2.4%.
Both Laobaixing and Yixintang sell pharmaceuticals, traditional Chinese medicine, nutritional supplements and medical equipment. They also complement each other geographically with Laobaixing strong in central and eastern China while Yixintang has focused on the southwest of China, particularly its home province of Yunnan.
Laobaixing, established in 2001, is 33% held by its founders. For years it counted EQT as a key backer but the Swedish private equity firm sold its 25% stake to FountainVest and Primavera for $557 million a year ago.
Yixintang, founded in 1981, is 31% owned by founder Ruan.
(Reporting by Julie Zhu; Editing by Edwina Gibbs and Susan Fenton)
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