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Mon, Apr 07 2014. 10 39 PM IST

Sun Pharma! s Ranbaxy acquisition: the winners and losers

Sun Pharma is buying Ranbaxy through an all-stock merger for $3.2 bn. Let! s see who benefits from the deal and how
Sun Pharmaceutical Industries Ltd is buying Ranbaxy
Laboratories Ltd through an all-stock merger in which five shares of
Ranbaxy will fetch four shares of Sun Pharma. Based on their
closing prices on Friday, a share of Ranbaxy valued at `460 will get
four-fifths of a Sun Pharma share valued at `458.
It seems a fair exchange ratio but Ranbaxy! s shares have risen
sharply since 27 March. The market appears to not only have got wind
of the deal but the ratio as well, since the share levels match the ratio
so well. That is something for the market regulator to investigate, if the
rise in Ranbaxy! s share price was a mere coincidence or if somebody
had insider information on the deal and acted on it. If we consider the
closing prices as on 27 March, Ranbaxy shareholders would have got
a 29.3% premium, which seems fair.
With Sun Pharma acquiring Ranbaxy, Daiichi is relieved of
the burden of managing Ranbaxy! s problems. Photo: Hemant
Mishra/Mint

WHO BENEFITS AND HOW

Daiichi Sankyo Co. Ltd: Daiichi is the parent company of Ranbaxy

since it bought the Indian drug maker from its earlier promoters.
Daiichi faced criticism after Ranbaxy! s plants came under the US Food
and Drug Administration! s (FDA! s) scanner shortly after the acquisition. Even after so many years, Ranbaxy! s inability to overcome its
FDA-related problems has put pressure on its promoters.
With Sun Pharma acquiring Ranbaxy, Daiichi is relieved of the burden of managing Ranbaxy! s problems. It will hold a 9% stake in Sun Pharma,
as a result of its current stake in Ranbaxy, though one can expect it to sell that stake eventually. On a conference call, however, Sun Pharma! s
management indicated they plan to work together with Daiichi to grow the business.
Ranbaxy: Along with the acquisition news, Ranbaxy announced that it received a subpoena dated 13 March (why this was not disclosed
earlier is something that should bother shareholders) asking for information about its Toansa facility that recently received an import alert from
the US FDA.
That this is material is evident from the fact that Daiichi has agreed to indemnify Sun Pharma from any costs or expenses that may arise from
this subpoena. Eventually, this news would have emerged in the public domain and may have further damaged investor sentiment.
But things change now for Ranbaxy. This is the end of the road for Ranbaxy as it exists but it perhaps is the best outcome for the company and
its shareholders, given the circumstances. Ranbaxy is a company with a very bright future in the US generics market, with a sizeable drug
pipeline and some big product launches in the waiting, but for frequent run-ins with the US drug regulator.
The fact that these glitches continued even after a new management was in control was a big surprise for investors. It is now up to the new
owners to ensure that the plants become and remain compliant with US FDA norms.
Sun Pharma: Sun Pharma! s managing director Dilip Shanghvi has acquired a reputation for acquiring companies in trouble at a good price,
and then turning around their operations. Ranbaxy will certainly be a big challenge.
The merger will see Sun Pharma! s revenue jump by a healthy 40% but its operating profit will rise by a meagre 7.5%, based on pro forma 2013
financials. Its operating profit margin will decline from 44.1% to 29.2%. Thus, the merger will have a negative effect on its performance in the
near term. Pro forma financial statements are designed to reflect a proposed change, such as an acquisition, or to emphasize some figures
when a company issues an earnings announcement to the public.
In terms of size, Sun Pharma will now have a pro forma 2013 revenue of `25,911 crore and an operating profit of `7,577 crore, with a net profit
of `1,710 crore. Ranbaxy! s profits have been hit by provisions related to inventory write-offs and foreign exchange-related provisions.

26-02-2016 01:19

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So, what does Sun Pharma hope to gain from this acquisition? Sun Pharma has said it expects to get $250 million, or `1,550 crore, in mergerrelated synergies by the third year after the acquisition is completed. That is fairly significant and these savings should be from sales growth,
procurement and supply chain efficiencies. But this merger is not really about scale and its benefits.
In the Indian market, the combined entity! s portfolio becomes much larger, covering more therapeutic areas. The challenge is that Ranbaxy! s
margins have been relatively lower and that is unlikely to satisfy Sun Pharma. The company management has said they will work on improving
its margins. In the US market, the priority will be to resolve all of Ranbaxy! s FDA-related troubles to ensure that every major generic product in
Ranbaxy! s pipeline makes it to market. These are crucial factors, in addition to their efforts to grow their combined business in Europe and
emerging markets, to ensure this acquisition works out in Sun Pharma! s favour.
Shareholders: Ranbaxy! s share is evenly placed based on the merger ratio and no further gains are likely to accrue to its shareholders.
Ranbaxy! s shareholders will now become Sun Pharma shareholders. They can choose to stay invested if they believe that Sun Pharma will be
able to make a much bigger and better combination, or exit at this point.
Sun Pharma! s shareholders may blink at the immediate effect of equity dilution of 16.4% and the effect on its profitability in the near term. This
is reflected in the stock market reaction to the announcement: On Monday, Ranbaxy! s shared declined by 3.1%, while Sun Pharma! s share
faced some volatility but closed with a decent gain of 2.7%."
There is also the matter of uncertainty on what further lies ahead for Ranbaxy! s regulatory troubles and how soon Sun Pharma can resolve
them. Running counter to these fears should be Sun Pharma! s ability to make this acquisition work in the long run. The company! s successful
track record in turning around acquired companies should give investors some hope that it can pull off the same magic at Ranbaxy as well.

26-02-2016 01:19