Malvinder Mohan Singh and family, the promoters of Ranbaxy Laboratories Ltd, have extracted top dollar for their investment in the company. The selling price of Rs737 represents a premium of 68% to the stock’s average closing price in the last six months. That’s not all. The highest price the stock has ever traded at was Rs650. And the average target price of 19 analysts tracking the company is Rs526, according to Bloomberg data.
A shareholder couldn’t ask for more, especially given the risks associated with the generics segment of the pharmaceuticals business. According to analyst with a foreign broker, “Daiichi Sankyo Co. Ltd has clearly overpaid. But keep in mind that it is buying out the largest pharmaceuticals company in the country, and this saves immensely in terms of time and effort compared to setting up operations from scratch.”
But minority shareholders will hardly benefit to the extent promoters did. There will be an open offer by Daiichi for 20% of Ranbaxy’s share capital, but total minority shareholding is 65%. This means only 31% of the minority shareholding will be accepted in the open offer. More than two-thirds of a minority investor’s shareholding will remain with him after the deal closes.
This is not to say that minority shareholders have been short-changed. As pointed out earlier, the acquisition price is very generous. But Indian takeover laws are such that the open offer needs to be only for 20% of the firm’s capital. True, Daiichi could have chosen to increase the scope of the open offer instead of buying additional shares through the preferential allotment route. But with the latter, the company it is acquiring will get a large cash infusion and help clear debt. Also, unlike certain other transactions such as Holcim’s stake buy in Ambuja Cements Ltd and Volvo’s deal with Eicher Motors Ltd, there is no attempt to avoid an open offer or arrive at a lower price for the offer.
In any case, Ranbaxy is the top performer among large-cap stocks this year, and that’s partly because of this deal—so investors have little reason to complain. Based on the stock’s current prices, it seems that the markets expect Ranbaxy shares to settle at around Rs500 after the deal closes. (This is based on the assumption that investors buying at current levels would have to pay tax on short-term capital gains at 30% for shares tendered in the open offer, since it’ll be an off-market transaction.) Few analysts have a price target for Ranbaxy that’s substantially higher than Rs500, so it seems best for minority shareholders to cash in at current levels.
The only reason for holding on is if one believes Ranbaxy’s fortunes would improve substantially with Daiichi coming in. It then probably makes sense to hold on to the remaining shares after cashing in on the open offer opportunity. Ranbaxy will get access to the Japanese market, which is the second largest in the world and where a number of products are coming off-patent. Besides, the cash infusion will help clear debt and/or help the company further its acquisition strategy. But, issues such as transfer pricing may crop up, and considering that the promoters have themselves chosen to cash in, it may prove risky for investors to hold on.
Daiichi will perhaps be the bigger gainer—its shares gained about 5% on Wednesday, indicating that its investors too approved of the high acquisition price. Three of its biggest rivals have also been on the acquisition mode lately to counter declining sales as their products go off -patent. Daiichi is expected to report an 18% drop in profit this year as a result of the Japanese government’s price cuts on drugs, and in that context, its entry in the non-propriety pharmaceuticals market is timely. The Japanese market, according to an analyst, is getting “genericized” and hence Ranbaxy will add immense value to Daiichi shareholders.
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