Mylan Laboratories Inc. has begun preparations for an open offer to mop up the near-24% public shareholding in its Indian subsidiary Matrix Laboratories Ltd, say three people familiar with the matter.
The open offer for Matrix could be a first step in delisting the local company’s scrip from the stock markets, which in turn is expected to give Mylan more flexibility to leverage the Indian drug maker’s manufacturing assets better with little regulatory obligations.
Mylan is the world’s third largest generics pharmaceuticals firm after its May buyout of the non-patented drugs business of Merck KGaA. The intent to delist the scrip of the Hyderabad-based Matrix was confirmed by three people close to the development—two executives of the company and a consultant who works closely with the drug maker. All three did not wish to be identified. Matrix CEO Rajiv Malik declined comment. Phone calls and emails to Nimmagadda Prasad, the firm’s founder and vice-chairman remained unanswered over four days. A Mylan spokesman, too, declined comment. “Mylan has no comment on the rumour that you have detailed,” Patrick Fitzgerald, its vice-president for public and investor relations, wrote in an email.
Mylan’s move, the consultant to Matrix said, has been triggered by two key factors. One, a prediction that the Indian rupee is likely to appreciate further against the US dollar on top of the 9% it has strengthened against the greenback since January. Therefore, making it more expensive for Mylan to mop up the shares if it chooses to do so at a later date. And two, the fact that the current price at which shares of Matrix trade is nearly 20% lower than what Mylan had paid to acquire a controlling stake in the company August last year.
Mylan had then acquired 71%, including 20% bought through an open offer, of Matrix for $736 million (Rs2,966 crore). If Mylan were to acquire the balance 29% holding in Matrix at the August 2006 offer rate of Rs306 per share, it would end up paying around Rs1,295 crore, but at the current price of Rs255 a share, Mylan would have to pay only around Rs1,075 crore, saving Rs220 crore.
As Mylan shifts more of its manufacturing to Matrix facilities in India, the increased business is bound to show up on the stock price, thereby increasing the cost of a complete acquisition in future.
Significantly, the public shareholding—nearly 24 %—in Matrix is marginally below the 25% listing requirement that India’s stock market regulator plans to make mandatory by May 2008 (up from the current minimum public holding requirement of 10% in listed companies). If Mylan wants the Matrix scrip to remain listed, it would have to offload some of the Hyderabad firm’s stock or dilute equity capital. Promoter Prasad holds about 5% in the company.
“Keeping these factors in view, Mylan is in the process of initiating steps to buy the balance holding in Matrix. The first among the series of announcements to this effect is likely to be made sometime in next quarter,” a person familiar with the plans said. Mylan may have to prepare itself for several rounds of open offers to completely buy out the balance holding in Matrix, this person added.
In a report issued earlier this month, Mumbai-based investment bank Edelweiss Capital named Matrix among 22 companies, including BASF India, Castrol India, Mphasis BFL, Henkel India, Ingersoll-Rand and Mysore Cements, which could see delisting moves by their parents.
Completely buying out Matrix and delisting it from Indian stock exchanges will vest with Mylan the entire benefits of operational synergies that will come about as it increasingly transfers its manufacturing businesses or that of Merck KgaA to the Indian firm’s low-cost facilities.
After the Merck KgaA buyout, Mylan chief executive Robert J. Coury projected a $250 million saving, most of which would come from integrating the company’s manufacturing with Matrix’s and aligning the two companies’ research and development.
Coury, who is also the chairman of Matrix, gave an indication of the work to be shipped to India at the local unit’s annual general meeting last week. “If it was Mylan that added volumes and efficiencies to Matrix, it is now Mylan’s acquisition of Merck that will bring more volumes to Matrix that allows it to achieve more scale and efficiency,” he told shareholders in Hyderabad. Mylan paid $6.7 billion for Merck’s generics business, nearly three times the target’s sales, in May this year.
In April, DSP Merrill Lynch predicted strong net profit growth for Matrix in the currently fiscal year and next. “We forecast strong 77% EPS (earnings per share) compound growth for Matrix over FY07-09 driven by integration benefits of Mylan’s acquisition, strong core business growth, impact of generic Norvasc supply and lower R&D spend,” the investment bank wrote in a research?note. Mylan makes and sells generic versions of Norvasc, Pfizer’s best-selling blood pressure drug.
Shares of Matrix closed at Rs251.95 on the Bombay Stock Exchange on Friday, close to the 52-week high of Rs279.16 on 11 August last year just before the Mylan takeover announcement. The shares registered their year’s low of Rs151.5 each on 7 March.