Sun Pharmaceutical has agreed to buy Ranbaxy Laboratories in an all-stock deal that values the rival Indian company at $3.2 billion, potentially creating the world's fifth-largest generic drug maker.
Under the terms of the deal, Ranbaxy shareholders will receive 0.8 Sun Pharma shares for each Ranbaxy share. Ranbaxy shareholders are expected to own about 14% of Sun Pharma once the deal is concluded.
The exchange ratio implies a value of Rs457 for each Ranbaxy share, which is a 0.5% discount to the April 4 closing price. That said, Ranbaxy’s share price has risen sharply in recent weeks ahead of the announcement, so the deal is also priced at a 18% and 24.3% premium to Ranbaxy’s 30-day and 60-day average selling price, respectively.
Analysts said that the biggest challenge for Sun Pharma, which was founded by Indian billionaire Dilip Shanghvi, is whether it can remedy Ranbaxy's ailing business.
“The main question is whether Sun Pharma can turn Ranbaxy around,” said Mumbai-based Daljeet S Kohli, head of research at brokerage firm IndiaNivesh. “We think it will be challenging given the problems Ranbaxy has faced, which includes a ban the US has on Ranbaxy’s products that are made in India,” he said.
Sun Pharma has a strong track record of acquisitions and has successfully turned around Israel-based Taro Pharmaceuticals and Detroit-based Caraco Pharmaceuticals. However, analysts believe that Ranbaxy's problems are more recalcitrant and, hence, harder to shift.
“Sun Pharma has had a history of turning around companies but we think turning Ranbaxy around will take a long time,” Kohli said.
Cutting its losses
Daiichi-Sankyo, which owns 63.4% of Ranbaxy shares, will be the second-largest shareholder of Sun Pharma once the deal is done.
The Japanese pharma company has long grappled with quality standards at its Indian pharmaceutical unit and has not been able to ensure product safety. The US Food and Drug Administration previously banned imports from its Indian plants in Mohali, Paonta Sahib and Dewas, and this year it banned products from its Toansa plant in India, citing quality concerns.
Daiichi is now showing a willingness to swallow bitter medicine by cutting its losses on Ranbaxy, which has been a drag on its business. Daiichi paid $4.2 billion for a 63.9% percent stake in Ranbaxy in 2008 -- which ultimately proved value-destroying. It will have the right to nominate one director to Sun Pharma’s board and will continue to hold a 9% stake in Sun Pharma.
The deal is expected to close by the end of 2014 and the combined entity’s revenues are estimated at $4.2 billion with Ebitda of $1.2 billion for the 12-month period ended December 31, 2013. The deal value implies a revenue multiple of 2.2 times based on the twelve months ended December 31, 2013.
The deal has been approved by Sun Pharma and Ranbaxy’s board as well as by Japanese pharmaceutical company Daiichi Sankyo but it is still subject to shareholder approval.
The combined entity will have operations in 65 countries, 47 manufacturing facilities across five continents and a significant platform of specialty and generic products marketed globally.
Citi and Evercore co-advised Sun Pharmaceutical, Goldman Sachs advised Daiichi and ICICI Securities advised Ranbaxy.
