Investor wants Sun to double offer for Taro

Sun Pharmaceutical’s efforts to acquire the remaining stake in Israeli firm Taro Pharmaceuticals Industries continue to run into the wall.

The Mumbai-based drug maker which holds 66% stake in Taro has made an offer to acquire the rest 34% at $24.5 per share, which is 26% premium to the traded price of $19.45 on Monday before the offer was announced.

However, this bid has been scuttled by one of the shareholders, Grand Slam Asset Management, which has written a letter to the Taro board that it is wholly unsatisfied with the Sun offer, saying “this is not a rational way of valuing Taro”.

Grand Slam believes that any fair offer for the remaining outstanding public shares of Taro should come at a minimum of 15 times Ebitda, at $48.5 per share.

The letter urges the Taro board to hire an independent counsel and investment bankers to force Sun to make a fair offer for the shares or to conduct an unbiased auction of Taro to find a buyer willing to pay a fair price.

Sun Pharma officials declined to comment.

Grand Slam has compared the mergers and acquisitions of several generic drug makers, including Bradley Pharma, which is a direct competitor of Taro, to argue that Sun’s offer price is inadequate.

The Grand Slam letter states that the six acquisitions of US generic drug makers in the last six years have been done at multiples ranging from 15 times to 24 times Ebidta (earnings before interest, depreciation, tax and amortisation) at the upper end of the range.

“Therefore Sun’s offer represents a 50% discount to the lowest deal multiple ever consummated for a US listed generic firm,” states the letter, pointing out that Bradley was sold at 15 times Ebidta.

Ranjit Kapadia, senior vice-president, Centrum Broking, said Sun will have to revive the price if it wants to buy the remaining stake.

Industry experts said the price of $48.5 per share, double of what Sun has proposed, is too high, despite taking into account the market movements, passage of time since Sun acquired 66% in Taro and other factors.

Sun had purchased 66% stake in Taro at $454 million four years ago.

“So Sun might have valued the whole entity that time at, say, about $750 million,” said an analyst, adding that the $24.5 per share translates into about $365 million for the remaining 34%, which is a reasonable price.

“Whereas $48.5 per share works out to $730 million, which Sun will have to shell out for getting the remaining 34% stake. Compare this with $454 million paid for 66%. Even if we take the time since the first deal, this price is too high,” said the analyst.