Mumbai/New Delhi: Taro Pharmaceutical Industries Ltd, an Israeli maker of off-patent or generic drugs, has called off its planned merger with India’s Sun Pharmaceutical Industries Ltd saying the acquisition value offered was “financially inadequate” given the turnaround in its operations and finances achieved since last year.
Sun Pharma had in May last year offered to acquire Taro for $454 million (Rs1,844 crore then), equivalent to $7.75 for each of the target’s share. But, following objections raised by Taro’s two institutional investors, Franklin Advisers Inc. and Templeton Asset Management Ltd, Sun Pharma had to revise its offer price to $10.25 a share and had agreed to merge the two firm.
If successful, the Sun Pharma-Taro deal would have been the second biggest takeover by an Indian drug firm, behind Dr Reddy’s Laboratories Ltd’s buy in February 2006 of Betapharma Arzneimittel GmbH for €480 million (Rs2,529 crore then).
Barrie Levitt, chairman of Taro, in a letter on Wednesday to Sun Pharma chairman Dilip Shanghvi said that the board of the Israeli company had decided to terminate the merger agreement since the Sun offer does not reflect “the future value that (Taro) expects to achieve from the changes made in its business model and the value in its new product pipeline”. Taro’s financial adviser Merrill Lynch too had advised it that the $10.25 price was inadequate.
Sun Pharma’s Shanghvi was not available for comments on how his firm would deal with the situation; Sun Pharma, according to a company spokesperson, holds a 34.4% stake in Taro. Responding to a query whether the firm will look for legal options to cou-nter Taro’s termination, the spokesperson told Mint, “We are looking at all options.” She did not detail the options.
No deal: Sun Pharma chairman Dilip Shanghvi. (India Today)
Taro’s notice also pointed out the merger will be in conflict with Israeli law as it was conditional on the elimination of a voting threshold required by Israeli law to implement the merger.
As reported by Mint a month after the takeover deal was signed between the two companies, Franklin Advisers and Templeton, which together owned approximately 9% in Taro, sought an open bidding process to maximize value for minority shareholders.
“We believe that...this transaction is void because it involves a very deep conflict of interests of the controlling shareholders who have a personal interest in the deal and that it was not approved according to appropriate corporate governance,” Templeton Emerging Markets Fund Inc.’s president Mark Mobius told Mint in an email in June.
Sun Pharma, the fourth largest drug maker in India by revenue, had planned to acquire Taro last year looking at an opportunity to expand its generic presence beyond the US. Taro has a very active market presence in Europe and the US apart from Israel and other West Asian markets.
Late on Wednesday evening, analysts tracking drug firms in India were unsure of the net impact of the failed deal on Sun Pharma’s financials. “On the one hand, the balance sheet will look healthier, better and the uncertainty of payback will no longer be there. The flip side is that it loses out on the market opportunity and technology (for manufacturing dermatology products) that Taro would have brought to Sun,” said Bhavin Shah, an analyst at Dolat Capital Market Ltd, an equity firm.
A Mumbai analyst, who did not wish to be named, said the impact on Sun Pharma would depend on how it would deal with its stake in Taro. “If Sun were to walk out and someone else buys their stake, then at what price will it go? Will they book a profit from the transaction in that case,” he asked.
It was not clear how Sun Pharma shares would react on Thursday trades. Shares of the company rose up by 6.61% on Wednesday ending at Rs1,466 each on a day the Bombay Stock Exchange’s main index expanded 1.53%. The Taro merger breakdown announcement was made by Sun Pharma after the trading hours.