It is curtains on a three-year litigation drama for Dilip Shanghvi, as his company, Sun Pharma — the country’s biggest drugmaker by market capitalisation — announced the completion of its open offer to acquire ordinary shares of Israel’s Taro Pharmaceuticals a few days ago. The fact that only less than 1 per cent of Taro’s ordinary shares were tendered in the open offer does not trouble Shanghvi, for whom closure of the offer was more important than its subscription level.
The end of the offer has triggered a clause in an agreement Shanghvi had signed with Barrie Levitt, the promoter of Taro, three years ago. The clause mandates that the promoter family will sell its entire stake for the same price as the open offer and make way for a change in management control. It’s Shanghvi’s turn to cross the last hurdle for a majority stake in Taro. The Israeli firm derives around 90 per cent of its revenues from US sales.
Known for his sharp focus on “distress assets” as acquisition targets, Shanghvi had made a big entry into the US pharmaceutical market by acquiring US-listed Caraco a decade ago. The turnaround of Caraco, despite its current troubles with the US regulator, was considered a classic low-cost acquisition. It took three years for Sun to make Caraco profitable. Another acquired asset, Able Labs of the US, turned profitable within a year of takeover.
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 by almost a year and the audited results were not even declared. Losses in 2006 were around $141 million.
Amidst the chaos, Shanghvi entered into an agreement with the Taro promoters when the cash-strapped Israeli company was struggling to stay afloat. Unfortunately for Sun and Shanghvi, the Taro promoters failed to honour the acquisition agreement and initiated litigation, which delayed the deal until a few weeks ago when Israel’s Supreme Court allowed Sun to go ahead with the open offer.
Today, Sun is the largest shareholder in Taro with close to 36 per cent stake and has, so far, invested close to $60 million for the equity at a price of $6-$7.5 per share. With the closure of the open offer, the Levitt family is expected to tender its shares to Sun, thereby allowing Shanghvi to gain 65 per cent management control over an entity where Sun has 48 per cent stake. However, one question remains unanswered. What will the Levitt family do? Whether they will submit their shares or Sun will have to seek legal remedy to force them to remain to be seen.
