BackStrides falls for Shasun’s charms
A strong balance sheet has whetted Strides' appetite for growth, which is seen in the number of deals it has struck
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This month has been eventful for Strides Arcolab Ltd. Last week, it said it would receive $150 million, or ₹ 920 crore, from Mylan Inc. It planned to invest $20 million from this in its own biotechnology business and distribute the rest to shareholders. That infusion seems to have paved the way for Strides’ acquisition of Shasun Pharmaceuticals Ltd in an all-stock deal. Strides’ current shareholders will get the dividend, which they would have had to share with Shasun’s shareholders if the amount had been received post-merger.
The share swap ratio of five shares of Strides for 16 shares of Shasun tracks their share values prior to the announcement, if one ignores the increase in Shasun’s stock price on Friday. Strides’ equity increases by one-third, and the combined promoter stake in the company rises to 30.4%.
What’s the deal all about? One line in Strides’ annual report mentions how the company is looking at efficient sources of active pharmaceutical ingredients (APIs), which are the main ingredient used in making medicines.
Now, Shasun’s business model mainly revolves around selling APIs, which contributed to 55% of sales in the year ended March, and contract research and manufacturing services for formulations. It has factories that have approvals from drug regulators in major markets such as the US. It also has a relatively small formulations business, but had plans to increase the share of formulations in revenue to earn better margins. The company’s debt was a thorn in its path, with gross debt to equity ratio at 2.3 times on 31 March.
In contrast, Strides has a light balance sheet after using the cash from the sale of its specialty business to pay down debt. On 31 March, it had a gross debt to equity ratio of just 0.5 times, and this will go down further since it has a healthy liquid cash balance as well. A strong balance sheet has whetted Strides’ appetite for growth, which is seen in the number of deals it has been striking, though none of Shasun’s size. Strides’ interest will be in getting access to Shasun’s range of product filings and production facilities with regulatory approvals from developed markets, which it plans to use to make formulations that operate in niche segments. Selling a larger number of products through its existing front-end operations will improve the revenue and profitability of these businesses and lower lead times as well.
Financially speaking, Strides’ revenues will more than double to ₹ 2,500 crore. But Shasun will drag down its profitability in the near to medium term. While its debt will increase significantly, Strides has enough cash and liquid investments on its books to absorb additional debt. But this merger is not about a straightforward mathematical addition, given Shasun’s poor financial condition. Strides will expect faster revenue growth and lower costs as a result of this merger, leading to better profitability for the combined entity, and investors will want some clues on what these numbers could look like. Some answers should become available after Tuesday’s analysts’ meet. The initial reaction of investors has been positive. On Monday, Strides’ share rose by 9.2%, while Shasun’s declined by 0.4% (it had risen by 4% on Friday).
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