Aurobindo Pharma Ltd’s decision to acquire Trident Life Sciences Ltd will make investors a bit cautious. After all, transactions between group companies can be opaque, raising concerns, especially if one of the companies is unlisted.
The Satyam scam has lent more credence to such concerns. The caution is all the more warranted because Aurobindo is buying a group company with a plant that is still being built.
Aurobindo has to pay Rs38.80 crore for the acquisition and also take on Rs96.10 crore of debt. In return, it gets a facility that is 75% complete and will specialize in making injectable medicines.
According to the company, the main logic for this transaction is to expand its capacity to make high-value sterile injectables. The new plant can produce 27million units of injectables.
At present, Aurobindo itself has enough capacity for injectables, but needs additional capability for non-oncological and non-infective injectables.
The acquisition will help it meet its existing licensing agreements and target more such business opportunities. It has one major customer in Pfizer Inc., with whom it recently expanded its licensing agreement to cover 60 drugs, including five injectables. Licensing income is expected to be a significant contributor to the company’s revenues; in the June 2009 quarter, licensing income was Rs43 crore, or 5% of consolidated operating income.
The company will need to invest an additional Rs25 crore to complete the Trident facility, taking the total cost to about Rs160 crore. The plant will get ready by this fiscal-end. After getting the necessary regulatory approvals, it expects to start supplies after April 2011.
The firm has been relatively transparent in its disclosures, disclosing the valuation and names of the financial advisers for this transaction. The cash consideration paid is for the equity value, based on its book value. In addition, the value is the lower of the estimates made by its financial advisers.
The level of transparency should give some comfort to its public shareholders, since lack of transparency has been a key concern involving group company transactions. They would have been happier, of course, if this project had been taken on by Aurobindo itself. After all, there seems no compulsive logic for a group company to have taken on a project, which overlaps with the listed flagship’s operations.
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