The founders and controlling shareholders of Ranbaxy, the Singh family, have agreed to sell their 34.8% interest to Daiichi Sankyo at a price of Rs737 ($17.17) a share. The deal, which also involves the issue of new shares and warrants to Daiichi, will precipitate an open offer to other shareholders in Ranbaxy, in accordance with regulatory guidelines in India, for up to 20% more shares at the same price.
The agreed price of Rs737 represents a premium of 53.5% to RanbaxyÆs average daily closing price on the National Stock Exchange of India for the three months up to June 10 and a premium of 31.4% to the Rs561 closing price on June 10.
Daiichi, which has a market capitalisation of around Ñ2.2 trillion ($20.5 billion), said its total outlay will be between $3.4 billion and $4.6 billion. Daiichi aims to ultimately own 50.1% of Ranbaxy's outstanding share capital, which it will achieve through a combination of the sale by the founders (34.8%); a preferential allotment of $1 billion of new capital in Ranbaxy that will give it another 9.5%; the open offer for up to 20% of RanbaxyÆs outstanding freefloat; and an issue of warrants, which if exercised could give Daiichi another 4.9% of the share capital. All the legs of the deal, including the strike price for the warrants, will be completed at Rs737 a share.
Ranbaxy also has $440 million of zero coupon convertible bonds due 2011 outstanding, which offer takeover protection in the form of a change of control put. Based on the current traded price of the convertible and taking assumptions based on March 31, 2009, the date the buyer and seller have indicated for deal completion, Barclays (in an update issued yesterday after the deal was announced) does not expect holders to convert post a change of control. Barclays concludes that currently there appears to be little value in the change of control put, given that holding the bond also includes some option value.
Proceeds from the preferential allotment will be deployed to retire the debt outstanding on RanbaxyÆs books. Ranbaxy said the deal values the company at $8.5 billion on a fully diluted basis.
Malvinder Singh will continue in his existing role as CEO and managing director and will also be appointed chairman of the board of Ranbaxy for an initial period of five years. Sources close to the deal say the composition of the board is still subject to agreement, however, it is expected that Ranbaxy will have four directors and Daiichi six.
It is speculated that the Singh family had contacted other buyers as well and Indian media has mentioned that Glaxo SmithKline may also have been in the fray. However, Malvinder Singh did not confirm or deny this in conversation with journalists yesterday.
Daiichi and Ranbaxy say the combined entity brings together complementary businesses, which span the spectrum of the pharmaceutical business, and that the expanded global reach enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products. Independent research suggests the Japanese pharmaceutical market will grow between 1% and 2% this year, while emerging markets like India and China are growing at more than 10%. Ranbaxy itself has given guidance to analysts that it expects revenues to grow by about 18% and profits to increase by up to 25% this year.
Daiichi also highlighted the scope to increase cost competitiveness by optimising research and development activities as well as manufacturing, especially in India where costs are lower than in some of DaiichiÆs other manufacturing and R&D centres.
Both analysts and shareholders were positive towards DaiichiÆs move and the stock gained 4.9% on the Tokyo Stock Exchange to close at Ñ2,975 yesterday.
Daiichi said it will finance the deal through a mix of bank debt and existing cash and that it expects the deal to be accretive to earnings per share before amortisation of goodwill in the fiscal year ending March 31, 2010, and accretive after amortisation of goodwill the following year.
Nomura Securities provided financial advice to Daiichi, while Jones Day and P&A provided legal advice.
Religare Capital Markets, a wholly-owned subsidiary of Religare Enterprises, is the exclusive financial adviser to Ranbaxy and the Singh family. Vaish Associates provided legal advice.
In addition to the open offer for Ranbaxy, Daiichi will also make an open offer for Zenotech Labs in which Ranbaxy has a 44.5% controlling interest. ICICI Securities will advise on the open offers for both Ranbaxy and Zenotech. Zenotech gained 20% yesterday to close at Rs18.80 as shareholders anticipated that the offer would come at a healthy premium to current prices.
Other companies owned by the Singh family in their personal capacity (i.e. not through Ranbaxy) also gained. These included Fortis Healthcare, an operator of super-specialty hospitals, which rose 18% to Rs81, and financial services group Religare Enterprises, which added 9% to Rs423, as shareholders of both companies anticipated that the Singh family would deploy at least some of the billions of dollars they realise from the sale to grow their other businesses.
The deal, which is India's largest inbound M&A deal after Vodafone's acquisition of Hutchison's India operations last year, had a generally positive effect on the Indian stockmarkets with the NSE index, the Nifty, gaining 1.66% yesterday. Pharmaceutical stocks were top gainers as investors and analysts alike speculated which company could be the next to be acquired at a hefty premium.