Sun Pharma buys Ranbaxy for $3.2b, turns it Indian again

Tags: News

All-stock deal involves $3.2b equity & $800m debt transfer

Soumonty Kanungo


Sun Pharmaceutical Industries, India’s largest drugmaker by market value, on Monday announced a deal to buy the Daiichi Sankyo-controlled Ranbaxy Laboratories in an all-stock deal worth $3.2 billion, thus creating the world’s fifth largest generic drugmaker.

The transaction comes at a time when many Indian drug firms are embroiled in legal battles with their western counterparts over intellectual property rights (IPR) issues or are under increased regulatory vigil from the US and the European Union.

The deal includes transfer of $3.2 billion worth of equity and Ranbaxy’s net debt of around $800 million. Sun Pharma is paying a 24.3 per cent premium to the 60-day average weighted price of Ranbaxy shares.

Ranbaxy shares closed in the red in Mumbai trading at Rs 445.20 apiece, down Rs 14.35 or 3.12 per cent, after rallying nearly 10 per cent to Rs 505 in morning trade soon after the deal was announced.

Sun Pharma shares hit an intra-day high of Rs 599 but closed at Rs 587.25, up Rs 15.35 or 2.68 per cent, as investors felt the deal was positive for the Mumbai-based firm.

Under the agreement, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each Ranbaxy share held. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium of 18 per cent to the 30-day volume-weighted average share price and a 24.3 per cent premium to the 60-day volume-weighted average share price as of close of business on April 4, 2014. Sun Pharma expects to close the deal by December 2014 and make the transaction EPS-accretive a year after.

The landmark transaction in the recent history of the Indian pharma industry makes Daiichi the single largest shareholder of Sun Pharma after its founder and managing director Dilip Shanghvi with a nine per cent stake and a seat on the board.

The combined entity will be the largest in the Indian market with exposure to 13 specialty segments. It will have operations in 65 countries with 47 manufacturing facilities across five continents, and a significant platform of specialty and generic products marketed globally, including 629 abbreviated new drug applications (ANDAs).

On a pro-forma basis, the combined entity’s revenues are estimated to be $4.2 billion with an Ebitda of $1.2 billion for the 12 months ended December 31, 2013. The transaction value implies a revenue multiple of 2.2 based on the 12 months ended December 31, 2013.

The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders, who are expected to own approximately 14 per cent of the combined company on a pro-forma basis.

Upon closing, Daiichi Sankyo will become a significant shareholder of Sun Pharma and will have the right to nominate one director to Sun Pharma’s board of directors, the company said in a release.

G V Prasad, chairman and CEO of Dr Reddy’s Labs, said: “It is a great move by Sun Pharma consistent with its strategy of acquiring distressed assets and turning them around.”

Daiichi had bought out Ranbaxy from Malvinder Mohan Singh and Shivinder Singh in 2008, trying to make major inroads into the Indian market, but the Indian firm encountered a series of problems soon after. Its ongoing tussles with the US food and drug administration snowballed after the takeover, leading to import bans on its manufacturing facilities at Mohali, Dewas, Poanta Sahib and Toansa, which catered to the US market.

The company was slapped a $500 million fine over felony charges. The Japanese firm accused the Singh brothers of misrepresenting facts and threatened to take them to courts.

Daiichi bought Ranbaxy at an enterprise value of $8 billion, with the shares valued at Rs 737 apiece. But the Japanese firm is getting rid of this troubled subsidiary at half that valuation. In doing so, Daiichi seems to be betting on the capability of the Sun Pharma management to deliver superior shareholder returns.

Whether this gamble pays off or not will largely depend on what kind of discounting pharma companies get on the bourses in the days to come. In the last four years, the discounting given to the pharma companies has gone up, partially because these stocks are considered defensive bets in a slowing economy. But this can change in the coming months if the cyclical stocks start performing well.

“It is a very synergistic transaction. It will help our transition to our long-held ambition of becoming a successful Indian company in the global pharmaceutical space,” Sun Pharma managing director Dilip Shanghvi said in a conference call. He said the merger would strengthens Sun’s presence in chronic therapy, acute care and the over-the-counter (OTC) segments. “The US has been the largest market for Sun and this deal will further strengthen our presence there,” he added.

Ranbaxy has significant presence in the Indian pharmaceutical market (21 per cent of total sales) and in the US (29 per cent of total sales) where it offers a broad portfolio of ANDAs and first-to-file opportunities. In several high-growth emerging markets (50 per cent of total sales), it provides a strong platform which is highly complementary to Sun Pharma’s strengths.

Sun Pharma has strong presence in the US (60 per cent of total sales) and India (23 per cent of sales), and also the rest of the world (contributes 17 per cent of sales). Thus, the combined entity will be more diversified with the US, rest of the world and India contributing 47 per cent, 31 per cent and 22 per cent of sales, respectively.

Ranbaxy managing director & CEO Arun Sawhney said, “Both companies share similar ambitions to grow globally with complementary strengths. It is a landmark transaction not only for Sun, but on the Indian pharma map.”

The merged entity will have global footprints across 55 markets with increasing presence in key emerging markets, such as Russia, Romania, South Africa, Brazil and Malaysia.

Sun Pharma said the acquisition would be accretive to cash earnings per share in the first full year. Additionally, Ranbaxy shareholders will participate in the value creation of the combined company through their ownership of Sun Pharma shares.

“Sun Pharma expects to realise revenue and operating synergies of $250 million by the third year from the closing of the transaction. The synergies are expected to result primarily in topline growth, efficient procurement and supply-chain efficiencies. As part of the transaction, Sun Pharma intends to leverage the human capital that has supported both companies, in order to drive future growth,” the company said in a statement.

The transaction will need approval by the majority in number, representing 75 per cent in value of the shares present and voting at the shareholder meetings of each of Sun Pharma and Ranbaxy.

Both Daiichi Sankyo (which holds approximately 63.4 per cent of the outstanding shares of Ranbaxy) and promoters of Sun Pharma (who hold approximately 63.7 per cent of the outstanding shares), have irrevocably agreed to vote in favour of the transaction.

Additionally, the closing of the transaction will be subject to customary closing conditions, including approval by the Indian government, the high courts of Gujarat and Punjab and Haryana, the Competition Commission of India and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act in the US.

Ranbaxy recently received a subpoena from the US attorney for the district of New Jersey requesting it to produce certain documents relating to issues previously raised by FDA with respect to the Toansa facility. In connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and expenses that may arise from the subpoena.

Sun Pharma had made 16 acquisitions so far including that of Caraco, Taro, DUSA and URL. The company is confident of turning around this acquisition as well.

Talking about the regulatory worries, Shanghvi said Ranbaxy’s India and emerging market business has a robust pipeline for growth and profitability. Sun Pharma’s own Karkhadi facility recently received an import alert from the US FDA on non-compliance over current good manufacturing practices (cGMP).

Brokerage Edelweiss said the merger was positive for Sun Pharma, given the complementarities of businesses and Ranbaxy’s depressed profitability and valuations.

“Given Sun Pharma’s track record of successfully turning around businesses, we believe it could harness Ranbaxy’s existing capabilities, geographical presence and product portfolio to improve the latter’s profitability. Ranbaxy’s Ebitda margin could touch the earlier targeted 16-18 per cent on scale up and operational efficiencies post merger,” it said.

Angel Broking analyst Sarabjit Kour Nangra said the deal was positive for the shareholders of both the companies. “The valuations are lower for Ranbaxy, which will have a new management. Today the share price of Ranbaxy fell in a knee-jerk reaction. Investors may also be reacting after its shares ran up last week. The stock had gained 22 per cent in the six previous sessions.”

Shares in Daiichi Sankyo rose as much as 4.1 per cent to a two-and-a-half month high of 1,827 yen in early Monday trade in Tokyo, outpacing a 1.2 per cent decline in the benchmark Nikkei.

Manoj Garg, an analyst at Bank of America-Merrill Lynch, said: “While the deal would be earnings dilutive in the near term (-4 per cent in FY16), we see significant synergies over the next 3-4 years which we believe will lead to 10-12 per cent incremental EPS in year 3 from the acquisition.”


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