To increase presence in global and domestic markets, Sun Pharmaceutical Industries is buying Ranbaxy Laboratories in a shareswap deal. Ranbaxy shareholders will get four shares of Sun Pharma for every five shares held by them. The exchange ratio represents an implied value of Rs 457 for each Ranbaxy share.
The deal will lead to 16.4% dilution in the equity capital of Sun Pharma. This is because its total equity value is $3.2 billion and the deal size is $4 billion (valuing Ranbaxy at 2.2 times last 12 months sales). The deal is expected to be completed by December 2014.
Experts say the deal will be good for Sun Pharma. Praful Bohra, senior research analyst, Nirmal Bang Equities, says, "We believe this is a good acquisition for Sun Pharma as it will help it fill therapeutic gaps in the US, get better access to emerging markets and strengthen presence in the domestic market."
Deepak Ladha, executive director, Ladderup Corporate Advisory, says, "It is an excellent deal for Sun Pharma. It will be a big boost to the investment morale in the domestic market. It will help Sun Pharma establish full spectrum presence, both therapeutically and geographically."
"Sun also has a successful track record of turning around distressed and difficult businesses," he says.
The acquisition will make Sun number one in the generic dermatology space. It is right now number three in the US in this space. Gross sales of the combined entity are estimated to be Rs 27,000 crore or $4.2 billion. Ranbaxy has a significant presence in the Indian market (21% sales) and in the US (29% sales), where it offers a broad portfolio of abbreviated new drug applications (ANDAs) and first-to-file opportunities. In highgrowth emerging markets (50% of Ranbaxy's sales), it provides a platform which complements Sun Pharma's strengths. Sun, on the other hand, has a strong presence in the US (60% of sales) and India (23%), while the rest of the world accounts for 17% sales. Thus, the combined entity will be more diversified with the US, the rest of the world and India contributing 47%, 31% and 22% of sales respectively.
As of March 2014, the promoter holding in Sun Pharma and Ranbaxy stands at 63.65% and 63.41%, respectively. After the acquisition, Sun's promoters' stake will come down to 54.6%, while Daiichi (the promoter of Ranbaxy) will hold around 9% in Sun. This will give Daiichi the rights to nominate one director to Sun's board. This will give Sun entry into Japan, the market with the highest growth potential given its huge size and low penetration of generic drugs.
OUTLOOK AND VALUATION
On the day of the announcement on April 7, Sun Pharma was trading at Rs 587.25 with a price-to-earnings ratio of 617.69. Market experts are bullish on the stock.
Meeta Shetty, analyst, HDFC Securities, said in a report, "We believe there is enough upside for both companies on revenue and profitability fronts. Hence, in spite of the dilution of return ratios as well as operating profit margins, we maintain a rich multiple of 24 times for the combined entity. The Sun Pharma stock can touch Rs 685."
Surajit Pal, senior research analyst, institutional equities, Prabhudas Lilladher, is also positive on the Sun Pharma stock.
"While the Sun Pharma management believes it can achieve $250 million synergy in three years, we believe that Ranbaxy's single-digit operating profit margin, forex derivatives, high consultancy costs and high tax rate are strong hangovers in the near term. The US Food and Drug Administration's approval to Nexium and Diovan could provide benefits of $300-400 million net income in the short term. We believe the stock can touch Rs 646 in the next few quarters," says Pal.
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