Dilip Shanghvi, the chairman and managing director of Sun Pharma, is readying for a long-drawn legal battle to get hold of Israeli drug major Taro Pharmaceuticals. In the battle that began in May 2007, Shanghvi has so far emerged as the largest shareholder in the company, with a 36 per cent stake, though Barrie Levitt-led Taro decided to backtrack from the $454-million acquisition.
In the latest development this week, Shanghvi informed the Israeli Supreme Court that efforts to reach an out of court settlement had failed, and left it to the court to decide the validity of Sun's open offer to mop up rest of the shares of Taro.
The hostile open offer was launched invoking an agreement of the failed merger deal — if the merger fails, Sun can attach the promoter’s shares and can trigger an open offer for rest of the ordinary shares. Levitt and Taro are now battling to thwart Shanghvi’s attempts legally in Israel, where the company is headquartered.
A drug trader turned drug manufacturer, such challenges are not new for 53-year old Shanghvi, a Gujarati who started his career in Kolkata and moved to Mumbai to set up a drug firm in 1983. Over the years, Sun emerged as the country’s most valuable pharmaceutical company.
In the last decade, Sun acquired over a dozen firms in India and abroad, most of them loss-making. Shanghvi and his team successfully turned these companies around in quick time. For example, Sun's flagship US subsidiary, Caraco Pharmaceuticals, was in a shambles when Sun acquired it about a decade ago. It took three years for Sun to turn the company around. Now, Caraco is a big revenue earner for Sun.
When Shanghvi first eyed five-decade old Taro, it was facing bankruptcy. Its losses in 2006 were to the tune of $141 million. Later, it increased by another $100 million. Its chief executive had to resign, following an investigation by independent directors. Relationship with wholesalers deteriorated and key products lost market in the US, where the company mainly operates. A sell-off was the only option for Levitt to save the company from an imminent liquidation of assets.
For Shanghvi, it was a good opportunity. Taro is a leading player in the US market, with several products in the over-the-counter dermatology products. Taro claims it has over 100 drug approvals in the US, with another 26 pending. Sun focuses on specialty prescription products and Taro's assets were a perfect synergistic fit. Taro had manufacturing locations in the US, Canada, the UK and Ireland, with a good basket of product registrations, which would help in an easy launch of Sun's products in these markets.
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On May 18, 2007, Shanghvi agreed to buy Taro for $454 million, including an immediate fund infusion of $45 million to save the company from liquidation. Soon, the company's fortunes reversed and in May last year, Taro announced that it was no longer interested in the deal. Sun sued Taro and Levitt in the New York District Supreme Court for not honouring the commitments. Cases were also filed in Israeli courts. Apart from the legal battle, a barrage of verbal duel ensued between Levitt and Shanghvi.
So far, Sun has invested close to $105 million to mop up 36 per cent shares, which carry 24 per cent voting rights. If Sun can attach the 12.5 per cent stake of the promoters based on a favourable court verdict, it will help in adding another 41 per cent additional voting rights, taking its overall voting rights to 65 per cent in the company.
If Shanghvi and team lose the case, they are likely to continue the battle to conquer Taro, in which Sun now is the major shareholder. Still, Levitt may legally try to defend himself from being eased out of the company, ensuring more legal battles ahead than the number of drugs in the pipeline.