Sun Pharma to buy Ranbaxy in $3.2B all-stock deal

Sun Pharmaceutical Industries Ltd, the country’s top drugmaker by market cap, is acquiring Ranbaxy Laboratories Ltd in an all-stock transaction, creating the world’s fifth-largest generics drug company and the largest pharma company in India by far.

The deal has an equity value of $3.2 billion, which values Ranbaxy much lower than what Japan’s Daiichi Sankyo paid to buy a majority stake in the company from Malvinder & Shivinder Singh six years ago. The overall enterprise value is pegged at $4 billion.

Daiichi Sankyo will become the second-largest shareholder of Sun Pharma with 9 per cent while Shangvi family who currently own 63.65 per cent will hold 54.7 per cent of the combined entity. Upon closing, Daiichi Sankyo will have the right to nominate one director to Sun Pharma’s board.

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.

Its revenues are estimated at $4.2 billion with 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.

Under the agreement, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium of 18 per cent to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3 per cent to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014.

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.

Ranbaxy scrip had shot up over 8 per cent to close at Rs 459.55 a share on BSE in a weak Mumbai market on Friday, which indicates the market had some inkling about the deal. In contrast, Sun Pharma shares last changed hands at Rs 571.9 a unit, down 1.18 per cent. After the formal announcement, Ranbaxy shares opened almost 10 per cent up but crashed later and ended the day at Rs 445.2, down over 3 per cent on Monday. However, Sun Pharma scrip was up 2.68 per cent in a flat Mumbai market to close at Rs 587.25 a share.

The transaction will need approval by 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 Ranbaxy) and promoters of Sun Pharma (who hold approximately 63.7 per cent of the outstanding shares thereof), have irrevocably agreed to vote in favour of the transaction.

Dilip Shanghvi, managing director of Sun Pharma, said, “Ranbaxy has a significant presence in the Indian pharma market and in the US where it offers a broad portfolio of ANDAs and first-to-file opportunities. In high-growth emerging markets, it provides a strong platform which is highly complementary to Sun Pharma’s strengths. We see tremendous growth opportunities and are excited with the prospects to create lasting value for both our shareholders through a successful combination of our franchises.”

Sun Pharma has a history of successful acquisitions and turning around mostly overseas acquisitions which could come handy in gulping down Ranbaxy. Sun Pharma scripted eight deals in the 90s and after a pause in inorganic growth in early half of the last decade, it again went on to acquire four firms during FY06-FY09.

More recently, it had turned more aggressive with deals like Taro besides DUSA and URL. Ranbaxy would be its boldest bet yet.

Interestingly, Sun Pharma had recently said it is exploring opportunities to partner or acquire companies in Japan to enter the market. A top company executive had said it could be a partnership or an acquisition. The latest deal also by default creates such a partnership.

Japan is a lucrative market for manufacturing low-cost drugs especially as politicians in the far-eastern country are lobbying for more generics to go on sale to bring down the cost of healthcare for an ageing population.

“We believe this transaction brings significant value to all Ranbaxy shareholders. Sun Pharma has a proven track record of creating significant long-term shareholder value and successfully integrating acquisitions into its growing portfolio of assets. We are confident that Sun Pharma is the ideal partner to help us realise our full potential and are excited to participate in future value creation opportunities,” stated Arun Sawhney, managing director and CEO of Ranbaxy.

For Daiichi Sankyo, the deal would take an albatross off its neck. It has been mired in controversy with troubles related to Ranbaxy in the US. However, the equity value of the deal means a valuation climb-down for the Japanese drugmaker.

Daiichi Sankyo had acquired majority stake in Ranbaxy through a mix of stake purchase from Singh brothers, preferential allotment and an open offer six years ago. It had paid Rs 737 a share for the deal. At the current deal value, it loses 38 per cent of the original investment value.

However, it would get a significant stake in the combined entity and could possibly look to hiking it further in the future.

Back-of-the-envelope calculations suggest Daiichi Sankyo will recover its mark-to-market value of original investment when Sun Pharma (after the merger) would trade at around Rs 925 a share. Sun Pharma scrip last traded at Rs 587.25 on BSE.

The proposed transaction has been approved by the boards of Sun Pharma, Ranbaxy and Ranbaxy’s controlling shareholder, Daiichi Sankyo. The boards of Ranbaxy and Sun Pharma have recommended approval of the transaction to their respective shareholders.

Pending approvals, Sun Pharma anticipates that the transaction will close by the end of calendar year 2014.

The acquisition is expected to be accretive to Sun Pharma’s cash earnings per share in the first full year. Sun Pharma expects to realise revenue and operating synergies of $250 million by the third year post closing of the transaction. These synergies are expected to result primarily from topline growth, besides procurement and supply chain efficiencies.

Ranbaxy has recently received a subpoena from the United States Attorney for the District of New Jersey requesting that Ranbaxy produce certain documents relating to issues previously raised by the FDA with respect to Ranbaxy's 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.

Citi and Evercore are acting as financial advisors for the transaction while Shearman & Sterling LLP, Crawford Bayley & Co and S. H. Bathiya & Associates are the legal advisors to Sun Pharma. ICICI Securities is the financial advisor while Luthra & Luthra Law Offices and Amarchand & Mangaldas & Suresh A Shroff & Co are the legal advisors to Ranbaxy for the transaction. Daiichi Sankyo’s financial advisor for the transaction is Goldman Sachs and its legal advisors are Davis Polk & Wardwell LLP and Amarchand & Mangaldas & Suresh A Shroff & Co.

(Edited by Joby Puthuparampil Johnson)

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