A tale of two deals

Contrasts in Piramal, Ranbaxy acquisitions.

In many ways, the Piramal- Abbott and Ranbaxy-Daiichi deals are a study in contrast. In Ranbaxy’s case, the promoter sold its stake and exited the company. In Piramal’s case, the company is selling only a part of the business.

More important, the proceeds of the sale will come into the company, unlike in the Ranbaxy case, where it went to the promoters. Of course, the Piramals, with over 50 per cent stake in Piramal Healthcare, will be the largest beneficiaries.

The other difference is the nature of the acquisition. Ranbaxy was more of a generics play for Daiichi Sankyo, where the Japanese also wanted to leverage on Ranbaxy’s presence in the US, Europe and, more important, in emerging markets.

‘‘Globally, the R&D (research and development) pipeline is not that robust for innovators, which could impact their growth. So, many of them are looking at emerging markets and the generics business. Ranbaxy fitted the bill on both counts,’’ said an analyst with a credit rating agency.

Ranbaxy has consolidated its presence in emerging markets. About 54 per cent of its sales come from emerging markets, against 44 per cent in 2005, while sales from developed markets have shrunk from 45 per cent five years before to 39 per cent today.

In the Piramal deal, it’s more of an India play for Abbott. It is acquiring the domestic formulations business, the market for which is growing by 13-15 per cent yearly. Abbott would hope to leverage its enhanced reach to launch new patented products.

What surprised people is the valuation in the Piramal deal, almost double that of the Ranbaxy one. Daiichi Sankyo valued Ranbaxy at $8.42 billion, almost 4.5 times its sales. At Rs 17,000 crore, Abbott valued the Rs 1,800-crore Piramal formulation business at almost nine times its sales, according to results for the year ended March 2010.

‘‘It’s an amazing transaction. It just shows that if you have a good quality, prime asset with leadership position, you can get a valuation at the top end of the bracket. Multinationals are willing to pay top-dollar for a good quality asset,’’ said Aditya Sanghi, president, investment banking, YES Bank.

It’s in line with the aborted Wockhardt deal. Sources in the pharma industry say Abbott was willing to pay five times the value of Wockhardt’s nutrition business. Also, experts say multinationals prefer to acquire unlisted businesses through a slump sale (as in the Piramal case), as it is a cleaner process than deals with minority shareholders.

At a common level, both deals represent the big charge of multinationals on emerging markets. Many companies like Daiichi Sankyo and Pfizer have been acquiring assets in emerging markets in Asia, Turkey and BRIC (Brazil-Russia-India-China) countries. Analysts say Piramal sold his formulations business, as he probably feels growing it would have been more challenging in the future, with the market increasingly driven by innovation products.