Sun Pharmaceutical’s three-year old protracted legal battle to take over the 60-year old Taro Pharmaceutical — meaning pharmaceutical industry in Hebrew — will be among the rare, action-packed and prolonged successful hostile acquisitions abroad by an Indian company, note industry observers.
Sun Pharma saw an opportunity three years earlier when Taro’s management was in search of a white knight to bail out the Israeli drug major, started by Israeli pharmacists and American physicians led by the Levitt and Moros families. Taro, which focuses on over-the-counter drugs in the US, Canada and Israel, provided a perfect complementary fit for Sun Pharma, which is focused only on complex speciality prescription products, mainly in the US market. Taro also has a manufacturing facility in Ireland, which Sun thought of using as a hub for its operations in Europe.
The 28-year-old Sun Pharma, led by its drug trader turned entrepreneur, Dilip Shanghvi, had a history of buying distressed assets cheaply and turning these around in quick time as very profitable businesses.
Taro, which went public through an initial public offering (IPO) in the US in 1961, had $100 million in sales in 2000. In the next year, the company raised $126 million for expansion and went on a buying spree, which included research facilities in the US, a manufacturing unit in Ireland and a large drug distribution unit in New Jersey.
Soon the company ran out of cash and had to borrow further. Then, Robert J Mauro, son of one of the founders who had headed Taro’s generics division, left the company. Inventories mounted and wholesalers did not pay back credit.It could not provide audited accounts since 2003. Within a few years, its cash position went from bad to worse and share prices crashed from over $60 to $6. A few European suitors assessed the company but decided not to take it over.
Taro was on the brink of bankruptcy in 2007 and that was when Shanghvi arrived. Taro and Sun announced a $454-million merger deal in May 2007. Sun’s offer was to acquire Taro’s complete equity for $230 million at $7.75 per share, a 27 per cent premium to its May 18, 2007, closing price of $6.10. In addition, Sun had agreed to refinance $224 million of Taro’s net debt. To save Taro from bankruptcy, Sun also paid $45 million to bring immediate liquidity and to pay back the creditors.
In return, Sun forced the Taro promoters — Levitt and his cousin, Moros’ family, to sign an ‘Option Agreement’ in case of a failed merger. It stipulated Sun was to make a tender offer to buy ordinary shares of Taro and simultaneously the promoter family was to surrender their shares at $7.75 each at the time of closure of the tender. Sun also bought shares from the open market to increase its shareholding to 36 per cent to become the largest shareholder in Taro.
‘CHANGED OUR MIND’
Exactly a year after the deal, the Taro management decided to drop the merger plan, citing better business health of the company and future prospects. A stung Sun Pharma filed a case in the New York District Court against Taro’s management for not honouring the commitment and alleged fraud, as the Option Agreement had clearly said any litigation would be restricted to the US, from where Taro gets over 90 per cent of its business.
A month after, in June 2008, Sun announced a tender offer provision. Taro challenged its validity in a Tel Aviv district court. But the court ruled in Sun’s favour and said that the Israeli special tender offer rules did not apply to Sun’s subsidiary, Alkaloida Chemical Company Exclusive Group (Alkaloida), to purchase all outstanding ordinary shares of the Israeli company at $7.75.
In July 2008, the Taro’s board appealed the decision in Israel’s Supreme Court. After six months, the court suggested Sun and Taro explore out-of-court settlement options within a month. But the discussions failed, despite Sun offering to give about $13 per share to take over the company, subject to its board approval.
LEGAL OFFENSIVES
What ensued was a barrage of words and letters between Shanghvi and Taro chairman Barrie Levitt. More litigation followed. Taro filed a suit against Sun in the US, alleging the Indian drug major had kept Taro shareholders in the dark over the US regulatory action against Sun’s subsidiary, Caraco. Sun, now the largest shareholder in Taro, approached the Tel Aviv District Court on May 14, 2009, requesting an order to Taro and its directors to publish the audited financial statements. Taro had not revealed its audited accounts since 2006. and also postponed a meeting of its shareholders three to four times.
Taro finally convened a meeting of its shareholders on December 31, 2009, and 78 per cent of minority shareholders, including Sun, voted against re-election of the existing directors. Templeton Asset Management, which holds a 10 per cent stake in Taro, had also urged shareholders to vote against the Taro board.
In May this year, the Taro promoters, through financial advisory Guggenheim, offered $15 a share to buy Sun’s stake, but Sun rejected the offer and said it would pursue the takeover.
Taro, which recently published audited results up to 2007, got a setback a month before, when the Israeli Supreme Court upheld the decision of the lower court. Since then, Levitt was left with no option other than to tender his shares.
