Mumbai: Sun Pharmaceutical Industries Ltd acquired a controlling stake in Israel’s Taro Pharmaceutical Industries Ltd, marking the culmination of a three-and-a-half-year takeover battle and sending the shares of India’s most valuable drug maker to a 16-year record.
The completion of the deal came two weeks after Israel’s Supreme Court said the acquirer could proceed with its tender offer for a successful closure, giving Sun Pharma control of a business spread across several countries with expected sales of about $400 million (Rs 1,820 crore) this year.
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Upon the closure of the tender offer, promoters of Taro transferred their 12% controlling stake to Sun Pharma under a private or option agreement.
“We intend to build on Taro’s market presence in the US, Israel and Canada,” Dilip Shanghvi, chairman and managing director of Sun Pharma, and the newly appointed chairman of Taro Pharma, said in a statement on Wednesday. “Taro’s current employees are an important part of our future plans for Taro and we are committed to productive relations with (them), and maintaining and enhancing Taro’s facilities in Israel as well as Canada.”
Taro’s portfolio of dermatology, topical and over-the-counter products complements Sun Pharma’s generic portfolio in the US, analysts said. Once the businesses are consolidated, the combine may also become the largest Indian drug maker in the US, besides being one of the top pharma firms in Israel and Canada, the prospect of which had led to Sun’s interest in the then ailing firm four years ago.
“We have tangible plans to significantly increase volume of production and approve further investments in research and development in Israel and Canada, with the scientific talent within Taro,” Shanghvi said. “We look forward to increasing the number of product filings of higher complexity, and our intent is to help Taro benefit from Sun’s resources and international presence.”
With the transfer of about 12% equity owned by Taro’s promoters—the Levitt and Moros families—to Sun Pharma and its subsidiaries under an option agreement, the Indian group now holds a 48.7% stake, with combined voting rights of 65.8%.
Taro said on Tuesday that the Levitt and Moros families had reached an agreement with Sun Pharma that facilitated the immediate transfer of their interest to Sun in accordance with the option agreement previously entered into by the parties in May 2007.
The move involves the resignation of current board members and their replacement with Sun Pharma appointees.
“We are gratified that Taro Pharma’s operational and financial turnaround leaves it on strong footing—and, we think, with a bright future ahead,” said Barrie Levitt, outgoing chairman and managing director.
Mint reported on 9 September that the Israeli court had allowed Sun Pharma to close a tender offer in the US to acquire all outstanding ordinary shares (mainly held by individual and institutional investors) of Taro Pharma. This offer was part of a private agreement signed in 2007 along with a $454 merger deal, when Taro was in trouble with accumulated debt.
The takeover battle was triggered by Taro’s unilateral decision to terminate the deal, saying that Sun had undervalued the company. But the private agreement contained the provision that Sun Pharma could, in the event of the deal failing, buy out the controlling or promoters’ stake after making a successful tender offer for the ordinary shares. Sun had invested $60 million in Taro at the time of the 2007 deal.
“We’re proud of what we have achieved in Taro’s 60-year history, especially in the last three years, and we take heart at the significant value that has been created for our shareholders,” Levitt said. “We offer our sincere hope that Taro will continue to thrive under the stewardship of its new majority owners.”
The delay in the deal has reduced the amount paid for taking control of Taro.
“We estimate Sun Pharma to have paid $37 million for the 12% controlling stake in Taro, with a total acquisition value of $143 million,” said Ravi Agrawal and Perin Ali, pharma sector analysts at Edelweiss Research, in a Wednesday report.
Sun Pharma invested $105 million over three years to acquire a 36% stake. If the deal had gone through without a hitch, Sun Pharma would have paid $230 million at $7.75 per share, a 27% premium to Taro’s 18 May 2007 closing price of $6.10. Besides, Sun had also agreed to take on Taro’s debt of $224 million. Having made profits in the last three years, Taro has cut its net debt to about $23 million.
To be sure, the deal is not without risks.
“Profit growth for Taro was almost flat in the last two years, and the 2008 and 2009 financials are still unaudited. So any negative statement after the audit of these two years’ accounts, and any issues on the integration of business will pose a risk for Sun Pharma,”said Ranjit Kapadia, senior vice-president (institutional research) at HDFC Securities Ltd.
Additionally, Taro’s manufacturing unit in Canada, from where it sources a significant portion of its products for the US and Canadian markets, is currently under the scanner of the US Food and Drug Administration (FDA) for quality issues, and any failure to address these issues will directly impact sales in those two countries, analysts said.
Sun Pharma is already facing similar issues as FDA has banned products from its subsidiary Caraco Pharmaceutical Laboratories Ltd’s facility in the US.
On the Bombay Stock Exchange, Sun Pharma’s shares on Wednesday closed at Rs 1,921.40 apiece, down 0.23%, after having risen to Rs 1,984.70, the highest since December 1994. The benchmark Sensex index fell 59.83 points, or 0.30%, to close at 19,941.72.
Bloomberg contributed to this story.