Mumbai: Sun Pharmaceutical Industries Ltd and Taro Pharmaceutical Industries Ltd have decided to terminate their August 2012 merger agreement, some three years after India’s largest drug maker by market capital acquired a majority stake in the Israeli company following a corporate battle that reached the courts in Israel and the US.

With the termination of the agreement, announced in a joint statement on Friday, Sun Pharma’s offer to all shareholders of Taro to buy their holdings at $39.50 (around 2,120 today) per share stands cancelled. Taro will, however, remain a subsidiary of the Indian company.

The move, announced the same day that Sun Pharma posted a 32% increase in third quarter net profit, follows objections raised by a group of investors, including minority shareholders, against the price offered by Sun Pharma, which is lower than the prevailing market price.

Sun Pharma in August said it plans to buy more shares in Taro from minority shareholders, including the public and a couple of institutional investors, to raise its stake in the Israeli company beyond the existing 66%. This offer was made to enable the merger of the company into Sun Pharma, which has turned around Taro since acquiring it at a time when it was ailing.

A merger would have given the Indian firm full control of the Israeli unit’s management. The proposed buyout of minority shareholders and the delisting of Taro from the New York Stock Exchange (NYSE) would have improved Sun Pharma’s cash flows because it would have saved on dividend payouts.

The firms said in their joint statement that they decided to call off the merger “in the best interests of the companies and their shareholders". The decision was taken at the direction of the special committee formed to handle the merger plan, said the statement made after the close of stock-market trading in Mumbai.

Shares of Sun Pharma fell 0.63% to 744.05 on BSE on Friday. The Sensex lost 0.49% to 19,484.77 points. Taro shares were trading 2.87% up at $52 on NYSE at 9.15pm India time.

“The termination of the merger plan will not have any significant impact on the revenue and the operations of Taro," said Sun Pharma chairman Dilip Shanghvi in a conference call with media and analysts on Friday.

In August, the merger deal was approved by Taro’s board of directors on the recommendation of the special committee.

Sun Pharma acquired a controlling stake in Taro in September 2010, after a three-year-long court battle between the two firms. They signed the first merger pact in May 2007.

The court battle was followed by a unilateral termination of this agreement by the Taro board after the firm’s promoters, Barry Levitt and his family, and a few institutional shareholders objected to the valuation. Following a series of battles in Israeli and US courts, Sun Pharma received a favourable order from the Supreme Court of Israel that allowed it to acquire a majority stake, including the whole holding of the promoters, in 2010.

With a 25% increase in net profit, the subsidiary contributed significantly to Sun Pharma’s third-quarter revenue and profit in fiscal 2013 that was announced on Friday.

“It (the termination of the merger) was quite expected as the shareholders had not agreed to the price of $39.50 a unit. Since the shares of Taro are currently traded at above $45 and also with the better performance, it would seem difficult to get shareholder consent for the merger at a lower price offer," said Hitesh Mahida, an industry analyst with brokerage Fortune Equity Brokers (India) Ltd.

“I don’t think termination will have any impact on the company’s business as Taro will remain a subsidiary of Sun Pharma till a consensus is made on the offer price," he said.

Sun Pharma’s net profit rose to 881 crore from the year-ago quarter’s 668 crore, it said on Friday. Exports grew 42% and margins widened substantially, helping it beat analysts’ estimates. Sales rose by one-third to 2,852 crore in fiscal third quarter from 2,145 crore a year ago.

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