Sun Pharmaceutical Industries Ltd, India’s largest pharmaceutical company by market capitalisation, has terminated a proposed merger agreement with New York Stock Exchange-listed Taro Pharmaceutical Industries, according to a company disclosure on Friday. The proposal, which was announced last August, would have taken Taro private by acquiring the stake held by minority shareholders of the firm for as much as $592 million.
Coupled with Sun Pharma’s earlier investments in Taro, the buyout of minority shareholders would have made it the largest acquisition by an Indian healthcare firm (within India or overseas) till date on a cumulative basis.
The company did not give any reason for the move but said it was mutually decided by Sun Pharma and Taro in the ‘best interests of the respective companies and shareholders.’
According to the proposal, Sun Pharma was to buy the shares owned by all equity holders of Taro – other than Sun Pharma and its affiliates – on cash payment of $39.50 per share upon the closing of the merger.
Taro shares traded at $40.97 a unit at the NYSE when the deal was announced. The shares climbed 25 per cent since then and last traded at $50.55 a unit on the NYSE.
As pointed out earlier by VCCircle, looking at the comparable peer group on the NYSE, Sun appeared to have struck a sweetheart deal. Even though its latest offer price was much higher than the original deal value (more on that later), its valuation multiple is much lower, compared to other pharma companies on the NYSE, most of which trade with double digital price earnings multiples (majority trade above 15x net profit).
Sun Pharma and its affiliates collectively own approximately 66 per cent of the outstanding Taro ordinary shares and 100 per cent of Taro’s founders’ shares, representing approximately 77.5 per cent of the outstanding voting power in Taro. Based on the outstanding shares of Taro, Sun Pharma required to shell out around $592 million for the balance 33.7 per cent (it owns around 66.3 per cent) in Taro.
Taro has strategic sales and marketing operations in Israel and Canada. It also has factories in those countries for manufacturing topical creams and ointments, liquids, capsules and tablets dosage forms, which complement Sun’s current manufacturing and development capabilities for the US.
Sun Pharma shares last traded at Rs 744.05 a unit, down 0.6 per cent on the BSE in a weak Mumbai market on Friday. The disclosure, however, came after the market hours.
The latest decision adds to a long history of Sun-Taro deal which got stuck in legal tangles. Sun Pharma had signed a $454 million merger agreement with Taro in 2007 including equity purchase of approximately $230 million at $7.75 per share in cash and refinance of approximately $224 million in net debt of Taro.
But in 2008, Taro unilaterally terminated the agreement citing lower valuations. In the same year, Sun Pharma launched an open offer to acquire additional stake in Taro, which was challenged by the latter. Both companies then filed suits in Israeli and US courts.
In September 2010, Sun Pharmaceuticals completed the acquisition of controlling stake in Taro, following the Option Agreement entered into during 2007, with Taro’s controlling shareholders led by chairman Barrie Levitt.
In October 2011, Sun Pharma made an offer to purchase all outstanding shares of the Israeli firm for $24.50 a share in cash – representing 25.96 per cent premium over the most recent closing price of Taro common stock (back then).
This offer, which would have translated into a payout of $367 million by Sun Pharma, was subsequently rejected by Taro’s board. The new offer was made at around 61 per cent premium to the previous offer price.
(Edited by Sanghamitra Mandal)