Daiichi Sankyo, a Japan-based pharmaceutical company, entered into an agreement with Ranbaxy promoters to acquire their entire 34.8% stake in the firm at Rs737 per share on 11 June.
The Japanese firm will further subscribe preference shares and warrant to the extent of 14.4% of equity and to make open offer to the shareholders for 20% equity at Rs737/share. We believe this deal will add value to both the companies and positive in the long-run.
As per our back-of-the-envelop calculation, we believe that acceptance ratio in the open offer would be at 33%. Assuming this, we arrived at value of around Rs473/share for the balance 67% shares in the hand of shareholders who choose to tender shares in the open offer (without taking into account the tax impact). This means, fundamentally, the market price at Rs473/share will offer minimal upsides.
Hence, we believe it will be better for short term traders to sell the share at current market price in the open market. However, in the longer term, the Daiichi will have plans to get the most synergy out of the deal because of which they have paid 737/share.
At the current market price of Rs.560, the stock is trading at 34.2x CY08 and 26.9x CY09 earning estimates. We believe the valuations are very rich in view of strong revenue and earning visibility over the next 3-4 years. We maintain HOLD on Ranbaxy with target price of Rs548.