BackTorrent gets prized parts of Elder’s portfolio at a good price
Torrent's investors will be concerned if the firm can successfully service its debt using the profits and cash flows of the acquired business
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Torrent Pharmaceuticals Ltd’s acquisition of Elder Pharmaceuticals Ltd’s domestic formulations business (including Nepal) will please those in the government who look at foreign direct investment (FDI) in healthcare with suspicion.
An Indian pharmaceutical business is sold but the ownership remains in Indian hands. Whether that played any role in the transaction is not known, but this transaction is likely to be completed sooner, compared with one that required the foreign investment promotion board’s (FIPB’s) approval. That should suit Elder as it needs money to repay its debts.
The company has been facing cash flow problems and on 7 November said in a stock exchange announcement that it had defaulted on a ₹ 10 crore interest payment to debenture holders.
Torrent is buying out Elder’s domestic pharmaceutical business for ₹ 2,000 crore in cash. The statement indicates that Torrent is buying out Elder’s products in the categories of women’s healthcare, pain management, wound care and nutraceuticals products. Torrent will buy the brands and the marketing infrastructure and manpower associated with these products will be transferred. Elder will retain the manufacturing facilities, anti-infectives, in-licensing and exports business as also its overseas subsidiaries.
In 2012-13, Torrent’s India formulation revenue was ₹ 1,024 crore and had increased by 13% over the previous year. Now, Elder has changed its financial year ending to June, so its annual report for 2012-13 is not available. Its previous year’s annual report shows that its domestic business contributed to 97% of standalone revenues, with exports bringing up the rest. The segments being sold account contributed to roughly half of overall revenues. Assuming their share of revenues remains the same in 2012-13, the revenues of the portfolio being sold works out to ₹ 490 crore.
That means Torrent is paying about four times sales for the business, which seems like a good deal considering valuations paid in earlier acquisitions. It has also got the prized parts of Elder’s portfolio while steering clear of relatively unattractive ones such as the anti-infective segment. The acquired products are a good fit to Torrent’s own strengths in categories such as gastrointestinal, cardio-vascular, and neurological products, which collectively contributed to 72% of sales in 2012-13.
Once the acquisition is completed, a better idea on the impact on Torrent’s profitability should become clear. The acquisition would have added about 50% to its domestic business revenues in 2012-13.
Shares of both companies fell—Elder by 8.2% and Torrent by 4%. The acquisition, identity of the buyer and the consideration were not a surprise, as they had been speculated upon in recent news reports. Now that the deal is done, it is back to basics for both companies.
Torrent will have to justify the acquisition’s logic to its shareholders. After all, it has cash worth ₹ 630 crore though its debt to equity is comfortable at 0.4:1 times. If it uses ₹ 400 crore from own funds and borrows the rest, its debt-to-equity ratio will go up to 1.4:1 times. Investors will be concerned about whether the company can successfully service this debt using the profits and cash flows of the acquired business.
Elder will repay its debt of ₹ 1,150 crore, and after paying taxes, should still have a decent cash stash left. If it reinvests it in strengthening its residual business, then investors may have something to look forward to. In any case, with a much-awaited sale a done deal and most of its lucrative branded formulations business gone, its valuation climb down a few steps. Once the dust settles, investors will evaluate what the company has to offer in its residual business.
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