, chairman and managing director of India's largest drug maker in terms of market capitalisation, Sun Pharmaceutical Industries, is ready for the final battle to conquer the elusive Israeli drug maker Taro Pharmaceutical Industries. In a few days, Sun will announce an open offer to acquire the ordinary shares of Taro, apart from seeking options to attach the share holding of Taro's promoters, one of the options available in failed merger agreements. Sun has also dragged Taro to a New York court for dishonouring the commitments in the merger agreement. Sun is the largest share holder in Taro with close to 36 per cent stake, and has, so far, invested close to $60 million for the equity, at a price ranging from $6-$7.5 per share. The investment so far in Taro is still a profitable deal for Sun, considering the current average share price of Taro is $10 per share. But trading profits were not the reason why Shanghvi invested so much money and effort in Taro. "We have had enough of delays, excuses... We will do everything to preserve our rights," Dilip Shanghvi said in a statement earlier.
Such challenges are not new for the 52-year-old Shanghvi and his experienced top team. In fact, they have perfected the art of taking over loss-making companies and turning them around. Sun has made 13 acquisitions before Taro, mostly of loss-making companies. It took three years for Sun to make the US-based Caraco profitable. In less than a year, US-based Able Labs, that Sun bought for $23 million, became profitable. When Sun Pharma zeroed in on Taro, there were 20 other suitors. The company was in a mess. The accounts were not in place and Taro restated the financial results for 2003 and 2004. The audit for 2005 was delayed for almost a year and the audited results were not even declared. Losses in 2006 were about $141 million. An investigation initiated by independent auditors resulted in the resignation of its chief financial officer.
Taro's debt burden mounted and it was facing liquidation of assets, owing mainly to efforts to reduce inventories with wholesalers, price erosion of certain key products, delay in new product introductions, and legal and accounting expenses. Sun Pharma decided to take the risk of acquiring Taro in a deal worth $ 454 million, with an immediate cash infusion of $40 million to save the company from bankruptcy. For Sun, Taro was a synergistic fit. Now a Rs-3,356 crore company, Sun's focus, since its inception in 1983, has been mainly on niche speciality generic products like psychiatry and central nervous system drugs. Taro generated most of its revenues from the US market, mainly by selling over-the-counter (OTC) products, that Sun Pharma lacked in its portfolio. Besides, Taro has manufacturing facilities in Ireland that Sun can use to tap European markets. The fund infusion helped Taro avert a crisis and it soon began to show better results. It was supposed to call a shareholders meeting to approve the merger announced in May last year. Taro postponed the meeting twice. A few months ago, the company reported net sales of approximately $313 million for the year ended December 31, 2007, with an estimated gross profit of $168 million. Minority investors, Franklin Advisers and Templeton Asset Management that hold 9 per cent in Taro, had approached an Israeli court demanding that the deal offer at $7.5 per share was inadequate. Sun was ready to revise the offer, to $10.25, subject to approval by its board. But talks failed to proceed and a month ago, Taro Cahirman Barrie Levitt said the merger deal was being scrapped, considering the "dramatic operational and financial turnaround" Taro had achieved since last year.
Sun felt this was improper and threatened to sue Taro for dropping the deal. After a month-long public duel, Sun has now exercised its options in the Option agreement, that had promised Sun could attach the shares of promoters if the merger failed.
If the hostile takeover attempt materialises, it will add another feather in the cap of the pharmaceuticals-trader-turned-manufacturer Dilip bhai "" the name by which Dilip Shanghvi is popularly known.
