Sun will pay $7.75 per share in cash, a premium of 27% over Taro's May 18 closing price of $6.10, which represents an equity value of approximately $230 million. Sun will also refinance $224 million of TaroÆs debt, taking the total value of the deal to $454 million.
For its most recent fiscal year, Taro had net sales of $297.7 million suggesting that Sun has paid a sales multiple of 1.5 times. Taro's net income was $5.7 million suggesting Sun has valued the company at 80 times its most recent income. Further, Taro is expected to declare a loss for 2006.
"We intend to build on Taro's expertise in dermatology and paediatrics along with specialty and generic pharmaceuticals, and over-the-counter products," says Dilip Shanghvi, chairman and managing director at Sun. The company will finance the deal through internal accruals and proceeds from an earlier $350 million convertible bond.
Taro put itself into play in March 2007, simultaneously with a delayed announcement of results for the 2005 calendar year, as it sought to address liquidity issues and questions regarding improper conduct by the companyÆs management.
The delay in declaring 2005 results was on account of irregularities which emerged in 2003 and 2004 results and hence the need to restate these. Taro explained the issue was ôadjustments in accounts receivable reserves following the receipt of information contained in formal customer inventory reportsö. Net income for 2005 at $5.7 million was considerably lower than the $14-16 million estimates earlier provided by Taro.
Investors question whether Taro management has been complicit in the accounting irregularities. Commentators say the company has treated minority shareholders unfairly. Indeed, Taro is currently mired in litigation. Earlier this month, Franklin Advisers and Templeton Asset Management, who own around 9% of Taro, filed a motion in the Tel Aviv courts to prevent ôoppression of minority shareholdersö. The investors allege that the founding family and The Blackstone Group are running the sale process in a manner prejudicial to the rights of minority shareholders and question whether current management will negotiate a deal in the best interests of all shareholders.
Sun manufactures and markets formulations as branded generics as well as generics in India, America and several other markets across the world. For its most recent fiscal year, it had a turnover of Rs20.1 billion ($515 million), with 43% derived from international sales, and net profit of Rs7.7 billion. It has a market capitalisation of around $5 billion.
The Taro transaction will be effected through the merger of a newly formed Israeli subsidiary of Sun into Taro. Sun clarified that it will pay all Taro shareholders, including the founders, the Levitt and Moros families, who own around 46% of the company, the same price.
Taro was advised by The Blackstone Group while Merrill Lynch, Pierce, Fenner & Smith provided a fairness opinion to the Taro board on the merger.
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