Sun Pharmaceutical Industries Ltd’s plan for the complete buyout of the Israel-based Taro Pharmaceutical Industries Ltd has hit another hurdle as minority shareholder Grand Slam Asset Management has asked Taro shareholders to reject Sun’s new offer of $39.50 (Rs 2,193) per share, saying it is not adequate. Grand Slam, which holds about five per cent stake in Taro, had also raised concerns when Sun had made its previous offer of $24.50. Mitch Sacks, chief investment officer of Grand Slam, in an email interaction with Reghu Balakrishnan, discusses his company’s demand and counters claims made by Sun Pharma Managing Director Dilip Shanghvi. Edited excerpts:
Sun’s Dilip Shanghvi has said he does not see value in Taro beyond what Sun has offered?
It is not in Shanghvi’s best interest to pay fair value for the remaining shares of Taro. Why pay fair value when you can get it at a heavily discounted price? Looking at comparable publicly traded company valuations or M&A (merger and acquisition) transactions, the price of $39.50 that Sun has offered and accepted by Taro’s board is not even close to Taro’s fair value. We believe if Sun does not think that Taro is worth what we believe is fair value, then Sun should open up the sale process to outside bidders. Such a process would also allow Taro’s board to fulfil its fiduciary responsibility to obtain the best price for all shareholders.
What is the expected price for Taro shares?
Taro’s two direct competitors, Perrigo Co and Glenmark Pharmaceuticals Ltd trade in the public markets at 18 times latest 12 months earnings before interest, taxes, depreciation and amortisation (LTM Ebitda) (as of August 13). So, a transaction at 15 times LTM Ebitda would be highly and immediately accretive to either of those companies, even before the impact of any synergies. This comes to a price of $110 a share.
What does Grand Slam plan to do at the coming shareholders’ meeting?
We plan to vote against the acquisition.
Are there any talks on between Grand Slam and other minority shareholders?
We have spoken briefly with a few other shareholders, mostly to clarify our valuation method. Those we have heard from generally seemed to agree that the offer from Sun was too low. However, we are not in talks with any other investors about pursuing some form of joint action.
Is there any plans to approach any Israeli/US court regarding the difference?
We are currently considering our alternatives.
After Sun’s buyout, Taro’s performance has improved a lot. Your comment?
We are not ignoring the fact. Also, we are not ignoring the fact that Taro had a prolonged legal battle with Sun which held back Taro’s performance for many years. When you allocate much of the company’s resources away from the core business, performance suffers. Once the legal battle was settled, Taro was able to regain focus on actually running its business. Taro was also previously a family-run business, and generally there are easy operational improvements that can be made after purchasing such a company.
Shanghvi is saying high prices in the US are not sustainable. What do you have to say on that?
This could be part of Shanghvi’s attempt to justify such a low offer for Taro shares. In reality, the price increases that Taro has implemented have sustained and are likely to continue to be sustainable.
The buyout process is going on for almost five years. What’s the reason for dragging the deal further?
The reason is to receive fair value. We do not believe we have been given any fair offers for our shares. You really need to ask Sun why they are dragging the deal by not offering a fair price to shareholders. We believe Taro’s board, with many who have been appointed by Sun, did not act in the best interest of the shareholders. Taro generates lots of cash every quarter and the longer Sun waits, the more it will cost them to purchase Taro and gain access to be able to use Taro’s cash. We believe that it is worth our time to wait and accept a fair deal than to give away our shares at the ridiculous price of $39.50 per share.
