Mylan makes major pharma acquisition in India

NYSE-listed Mylan Laboratories to acquire 71.5% of IndiaÆs Matrix Laboratories for a maximum price of $736 million in deal in which private equity investors in Matrix Laboratories will take a stake in acquirer, Mylan.
NYSE listed Mylan Laboratories ("Mylan") announced on August 28 that it will acquire 71.5% of IndiaÆs Matrix Laboratories for a maximum price of $736 million. The transaction has been structured in a way that part of the gains realised by the private equity firms on their investment in Matrix Laboratories will be reinvested in acquirer, Mylan. The deal values Matrix at $1.03 billion and represents a 22 times earnings multiple. The transaction is one of the largest to date for India's pharmaceutical industry.

The transaction will be effected through the purchase of 51.5% of Matrix shares through a negotiated agreement with the private equity firms and an open offer, pursuant to IndiaÆs takeover code, for another 20% from minority shareholders. On a per share basis the price agreed is Rs306 ($6.65). Private equity investors Temasek, Newbridge and Spandana Foundation (a trust controlled by the Matrix founders) whose combined holding is currently 40%, will have a complete exit from Matrix after the takeover while Matrix executive chairman and promoter, N Prasad will continue to own, in his personal capacity, 5% of the share capital of the company he founded. Prasad will become non-executive chairman; he will join the Mylan board and executive management team as head of global strategies in the office of the CEO.

For the fiscal year ended March 31, 2006 Mylan registered revenues of $1.3 billion on which it had net earnings of $184.5 million. It has around 2800 employees. Matrix had revenues of $261.6 million on which it had net earnings of $45 million. Staff-wise, however, it is not much smaller than Mylan, with 2300 employees. Investment banking sources comment that "the benefits of the combination are obviously a compelling reason driving the valuation and transaction".

Newbridge, Temasek and Prasad will use part of the money they receive to purchase newly issued shares of Mylan. Newbridge will invest about $93 million, Temasek about $46 million, and N Prasad $25 million - or $164 million in total. Shares will be acquired at a price of $20.85 per share (the average of Mylan closing share prices for the 10 trading days prior to the announcement of the transaction). Newbridge and Temasek will jointly own about 2.9% of Mylan at the end of the transaction.

Analysts comment that the decision by the private equity investors to remain invested in Mylan "reflects how important Matrix could be, going forward, for Mylan. Mylan is not simply acquiring cashflows but is acquiring a platform on which a significant portion of its future growth could be derived."

Matrix Laboratories manufactures active pharmaceutical ingredients (APIs) and solid oral dosage forms. It is one of the fastest growing API manufacturers in India with a focus on markets such as the US and the EU. The company has a wide range of products. Matrix recently acquired Docpharma, Belgium, for a front-end presence in Europe. It also has a controlling stake in Mchem (China) and Concord Biotech India. In commenting on the transaction rationale Mylan drew attention to the emerging markets and European footprint it would acquire through Matrix and further added that the transaction would ôallow Mylan to capture incremental pieces of the value chain through backward vertical integrationö.

Newbridge and Temasek invested in Matrix in April 2004 at a price of Rs1,500 per share. Originally, the two private equity investors were in independent discussion with Matrix management but ultimately they decided to jointly acquire a stake, triggering an open offer to minority shareholders of Matrix. After the offer, Temasek and Newbridge owned around 38.5% of Matrix. In October, Matrix did a 1:1 stock split then sub-divided its shares with a face value Rs10 each into Rs2 each.

Not accounting for dividends received (but after all capital restructuring just mentioned) the cost per share for the private equity firms was Rs150. Hence in just over two years the private equity investors have made more then a 100% return on a per share basis.

Mylan announced that it expected the transaction to be moderately accretive to management's earnings estimates in fiscal 2008, the first full fiscal year following the anticipated closing of the transaction, and significantly accretive thereafter. The transaction is expected to close by the end of 2006.

Merrill Lynch and DSP Merrill Lynch acted as financial advisor to Mylan on the transaction. DSP Merrill Lynch will also be advisor to Mylan on the open offer. ABN Amro and UBS acted as financial advisors to the selling shareholders.

The sale price - Rs306 per share - represents a 15% premium to the 30 day average Matrix share price.
¬ Haymarket Media Limited. All rights reserved.
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