MUMBAI: With Sun Pharma agreeing to buy Ranbaxy Laboratories in a unique all-stock deal which involves no cash outgo, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each Ranbaxy share they own. The exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium of 18% to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014, said a company statement.
Faced with prolonged US regulatory issues resulting in a ban on its four domestic plants, and losses on foreign currency loans, Daiichi was looking to sell the troubled Ranbaxy for a while now. Sun, with its past experience in turning around troubled assets, looks well placed to handle the situation, analysts said.
Under the deal, the Japanese company will end up with a stake of about 9% in Sun Pharma, valued at about $2 billion, compared with the $4.6 billion it paid for an over 63% stake in Ranbaxy in 2008. The original acquisition cost was Rs 737 per share. Besides, Daiichi also wrote down $3.5 billion in 2009 to cover a drop in the value of its initial investment after regulatory problems in the US, which also resulted in a drastic erosion of its share price. A questionnaire mailed to Daiichi went unanswered.
The transaction, which is expected to close in nine months after securing all regulatory approvals, values Ranbaxy at 2.2 times its $1.8 billion revenues for 2013 or about Rs 457 per share. Post-deal, Daiichi will be Sun Pharma’s single largest shareholder after promoter Dilip Shanghvi himself, with a 9% stake and a seat on the company’s board.
Besides the fast-growing Indian market, Ranbaxy’s underlying business has “robust growth,” and profitability potential, based on which the price Sun is paying for the deal is “justified,” Sun Pharma MD Shanghvi said, adding, “It offers a broad portfolio of ANDAs (abbreviated new drug applications), first-to-file opportunities and the company’s entry into the over-the-counter market. In high-growth emerging markets, it provides a strong platform which is highly complementary to Sun Pharma’s strengths”. Shanghvi also said that the combined entity would focus on fixing manufacturing quality issues at Ranbaxy so that facilities currently banned from shipping to the US, the biggest export market for both Ranbaxy and Sun, can resume exports.
The combined entity will have operations in 65 countries, 47 manufacturing facilities across five continents, and a significant platform of specialty and generic products marketed globally, including 629 ANDAs. The deal is expected to realize $250 million in sales and operating synergies by the third year of its close, said Uday Baldota, senior VP finance, Sun Pharma. Details of the new management structure will be announced soon, but Sun Pharma’s existing chairman, Israel Makov, is expected to head it.
“It’s a unique and smart deal with a reasonable multiple, offering good value to Daiichi. Sun Pharma has taken a calculated risk (with Ranbaxy) and hopefully should be able to resolve the regulatory issues and leverage the company’s inherent strengths,” said Sujay Shetty, leader, life sciences at PwC India.
V Krishna Kumar, partner, life sciences & healthcare at EY, described it as a good fit. “In addition to size/scale benefits, the domestic portfolios of the two companies complement each other well. Sun’s domestic portfolio has a bias towards specialties (such as CVS, CNS and Oral Anti-diabetes), while Ranbaxy’s domestic portfolio has large primary-care and OTC segments as well,” he said.