One would be hard-pressed to find a better example of how not to run a business than the sorry saga of Australian Pharmaceutical Industries, owner of Priceline, Price Attack and Soul Pattinson.

API recently announced a loss of $15.8 million before income tax benefit for the year ended 30 April 2007 (on EBIT of $7.1 million, down from $39.4 million the previous year). API also recorded cash outflows of more than $15 million, which is a very worrying sign.

API also spent $6.2 million on “one off” items to outside advisers, including a review of its House and Price Attack businesses, which makes you wonder exactly what management actually do.

Today’s API resulted from the merger of the former API businesses (which include Soul Pattinson, Chemworld and API Health Care) and New Price Retail (which consisted of Priceline, House and Price Attack). The deal was akin to a reverse takeover, with API acquiring New Price Retail for $112.4 million in December 2004, but New Price CEO, Jeff Sher, becoming CEO of the merged entity.

Sher had previously led a private-equity backed management buy-out of New Price Retail from its South African parent, New Clicks, only six months earlier. The deal was a remarkable success for New Clicks’ private equity owners, who made a return of 120% in a little more than six months.

Unfortunately, the merger hasn’t been so lucrative for API’s shareholders. The biggest hiccup was when API managed to “misplace” more than $17 million, allegedly as a result of the integration of several computer systems in 2006. The misplaced cash led to the departure of Sher and the appointment of Stephen Roche as CEO.

Things haven’t gotten all that much better, with the company announcing last week the sale of its House business (which was originally from the New Click’s side) to interests attached to Solly Lew for $8.5 million.

API claimed that it sold the business because House “operates in a highly competitive market [with few] material growth opportunities into the future.”

New Clicks paid R68 million for a 66-store House franchise back in 2000 – or $16.3 million in AUD terms. Therefore, under API and New Click’s management, and adjusting for inflation, API managed to sell House for around 44% of what it paid for it. It takes a very special business to destroy that much value in such a short time.

API’s share price has dropped from 27% since its merger with New Clicks. During that time, the broader market has risen by more than 50%. Not an ideal result for a merger which API chairman, Peter Robinson, claimed would be EPS positive in year one.