The sharp drop in Piramal Healthcare Ltd’s share price may seem anomalous to some, considering that it is getting $3.7 billion (Rs17,390 crore) in cash from the sale of its domestic formulations division to Abbott Laboratories Inc. But the disappointment does not stem from the sale or the consideration, but from the structure of the transaction. Speculation of an impending sale had seen Piramal’s share price jump by nearly 50% in the past three months. The basis for that rise is not just ownership moving to a global multinational, but also the open offer that would have followed an acquisition.
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But what has happened was unexpected. The core of Piramal’s business, its healthcare solutions business that markets branded generics in India, is being sold to Abbott. This business contributed 57% of sales in the March quarter and grew by nearly 40% compared with the year-ago period. This division also compensated for a sharp drop in its custom manufacturing business, which slowed Piramal’s overall sales growth in the March quarter to just 11%. The healthcare solutions business is a prized one, which explains the rich valuations paid by Abbott for the business, at nearly 7.5 times sales.
The residual business in Piramal comprises its custom manufacturing business, clinical research services, over-the-counter consumer products and inputs used to make formulations. After the transaction, Piramal’s sales will nearly halve. Excluding pharmaceutical solutions, custom manufacturing will contribute half of the revenue, but its sales declined in fiscal 2010 by 17%. This business is expected to recover in fiscal 2011 and its other businesses such as critical care, too, are expected to contribute to growth.
The outlook for Piramal depends on how it plans to spend the money. Of the Rs17,390 crore, it will get Rs10,300 crore now and the rest in four equal annual instalments. In a strange transaction, Piramal needs to pay its promoters Rs350 crore for signing a non-compete clause. It has debt of Rs1,300 crore, which can be repaid from the proceeds. It will pay around 22% as capital gains on this transaction. That will leave it with approximately Rs11,300 crore on a post-tax basis, including the current value of the four annual instalments. This is a notional figure with assumptions made on the tax and discount rates.
It works out to around Rs540 per share, while the current share price is only Rs500. How much Piramal pays out immediately as a special dividend will determine near-term sentiment. Its long-term valuation, however, depends on the big idea it comes up with to utilize the windfall. A move to become a significant player in a large and fast-growing industry will be transformative and good for the longer run. But a move to become a holding firm which invests in several businesses may not be as welcome.
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