Swiss drug maker Novartis AG’s open offer to buy-out a majority of its Indian subsidiary’s minority shareholders seems like a fair move. After all, the parent company is offering a 42% premium to the average traded price of the shares in the past six months.
Also, the price of Rs351 it is offering was last seen in January 2008, an offer minority shareholders of any company would jump at, given the sharp decline in equity prices in the past year.
But Novartis’ is a different story. Some minority shareholders feel that the company has been short-changing them for some time already and that the offer price doesn’t truly reflectthe intrinsic value of the company.
Last year, Reliance Mutual Fund had raised uncomfortable questions on the use of surplus cash by the company. The company had cash and cash equivalents worth about Rs400 crore as of March 2008, of which it had loaned Rs340 crore to Novartis Healthcare Pvt. Ltd and Sandoz Pvt. Ltd, both of which are 100% subsidiaries of Novartis AG.
The company hasn’t disclosed the interest rate it charges these companies, except to say that its investment policy is based on the following priority list—safety, liquidity and returns—and that the interest rate is in line with market rates. Some investors have questioned why the company hasn’t instead chosen to return excess cash to shareholders.
These issues, coupled with the fact that the business has hardly grown in the past three years, have resulted in low valuations.
Adjusted for the cash on the company’s books, the company trades at just six times trailing earnings. Note here that the company will add at least another Rs100 crore in cash flow from operations this fiscal year.
The positive thing about Novartis AG’s decision to increase its stake to 90% is it eliminates concerns about conflict of interest.
So far, the parent company hasn’t unduly favoured its unlisted subsidiaries in terms of new product launches and the like, but the markets had every reason for worry, given the large difference in ownership.
Novartis AG’s decision to take its stake to 90% rather than buy out all minority shareholders and delist the company is obviously to avoid the reverse book building process, where minority shareholders have some say in what the offer price should be.
If the company is successful in raising its stake close to 90%, the stock’s liquidity will fall further and remaining shareholders will have less bargaining power when the company finally chooses to delist.
Novartis may have avoided the reverse book building process, but minority shareholders can still have their say by not choosing to participate in the open offer, especially since some of them feel that the current offer price is low.
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