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In the largest bulk deal on Dalal Street, Japanese pharmaceuticals giant Daiichi Sankyo sold its entire stake in Sun Pharmaceutical Industries for $3.2 billion (about Rs 20,000 crore). The price of share came down to Rs.951 from Rs.1,044.

Sun Pharma’s acquisition of Ranbaxy

Daiichi was holding 63.41% stake in Ranbaxy. On April 6, 2014, Sun Pharmaceutical Industries Ltd (“Sun Pharma”) and Ranbaxy Laboratories Ltd (“Ranbaxy”) announced that they have entered into definitive agreements pursuant to which Sun Pharma will acquire 100% of Ranbaxy in an all-stock transaction worth $3.2 billion that will create the world’s fifth-largest generics (or off-patent) drugs company by revenue and India’s largest ‘pharma’ firm by market share.

As a consideration for the merger, Sun Pharma issued 8 fully paid up Equity Shares of Rs. 1/-each to the shareholders of Ranbaxy for every 10 Equity Shares of
Rs. 5/- each held by them of Ranbaxy.

The combined entity would have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and
generic products marketed globally.

Daiichi’s holding of 9% in Sun Pharma post-merger made it the second largest shareholder in Sun Pharma and had the right to nominate one director to Sun’s
Board of Directors. Structure and terms of the transaction gave the impression that merged Sun Pharma will have benefits of Daiichi’s reach and Daiichi and Sun Pharma will work together for the growth of the merged entity.

Problems in the merger:

  1. Public scrutiny by Competition Commission of India:
    • In the first-ever public scrutiny of an M&A deal in India CCI, today invited comment from all stakeholders, including the general public, on finer details.
    • The CCI said the public consultation process has been launched “in order to determine whether the combination has or is likely to have an appreciable adverse effect on competition in the relevant market in India”.
  2. A group of Investors filed a petition alleging insider trading in the shares of Ranbaxy in the days leading to the announcement of the Transaction. A group of investors claimed that entities with prior knowledge of the deal illegally profited to the extent of INR 2.85 billion.

Sequence of Transaction:

Date

Particulars

12th June 2008 Daiichi acquired Ranbaxy in a $6.4bn deal ($4.2bn cash)
25th February 2009 USFDA* says Ranbaxy falsified data, test results in drug application
13th May 2013 Ranbaxy pleads guilty to poor manufacturing standards at Dewas & Paonta Sahib and falsifying data in a $500m settlement with the US department of justice.
Sept 2013 – Jan 2014 USFDA issued an import ban on Mohali and Toansa plants in Punjab over poor manufacturing standards.
6th April 2007 Announcement of the acquisition of 100% shares of Ranbaxy by Sun Pharma.
25th March 2015 Press Release by Daiichi regarding completion of merger
20th April 2015 Press Release by Daiichi to sell the shares of Sun Pharma
21st April 2015 Press Release by Daiichi regarding completion of sale of shares of Sun pharma

*United States Food & Drug Administration
Image Source : Asian Scientist

Analysis:

Daiichi was holding 26,87,11,323 shares i.e. 63.22% stake in Ranbaxy as on 31st December 2014. As per the swap ratio, it received 21,49,69,058
shares of Sun Pharma.

When Daiichi sold shares in Sun Pharma it was predicted that Dilip Sanghvi, MD of Sun Pharma will purchase the shares but he didn’t.

Gain to Daiichi –

Particulars

Rs. (In crores)

Acquisition price (26,87,11,323 shares*Rs.737) 19,804.02
Sale Price (21,49,69,058*932)** 20,035.12
Total gain 231.10

Note: We have assumed that the number of shares is same as on the date of acquisition & sale. The acquisition price was approx. Rs.737.

** The above gain is without considering the loss because of foreign exchange fluctuation.

Objective of merger and end result:

Early what seems as merger actually amounted to cashless acquisition by Sun Pharma partly financed by minority shareholders of both the companies. First time for any major acquisition, shares is used as the currency of acquisition. Both parties agreed to the structure because of an easy process, less hassle in approvals and reduction in transaction cost. Further, it reduced the cost of acquisition for Sun Pharma promoters and also made a cashless acquisition as they are not required to give an open offer to public shareholders of Ranbaxy. But the reason for an exit as given by Daiichi was, from the perspective of the improvement of corporate value, Daiichi Sankyo has performed a review of the Sun Pharma shares and reached a conclusion to sell the shares entirely or partially.

Main Contributors : Neha

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