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September, 2006 Pragati Maidan, New Delhi, India |
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US Pharma Cos Take Pole Position In M and A Race
Indian companies with low promoter holdings relatively more constrained
With the bidding wars in the global generic industry pushing acquisition costs to higher levels, strong balance sheets and the willingness of promoters to dilute equity will become critical factors for Indian companies to successfully participate in M&A opportunities.
A CLSA report states that Sun Pharma is best placed to take advantage of future opportunities with $450m in cash and FCCBs above conversion price. Ranbaxy and Dr Reddy’s Laboratories post their recent acquisition shave constrained balance sheets with $800m and $550m in net debt, respectively.
Also, Indian companies with low promoter holdings will be relatively more constrained to raise resources via equity dilution to participate in attractive opportunities when they arise. Promoter holding in Sun Pharma on a fully diluted basis is 64%, while it is 32.5% and 27.5% in Ranbaxy and Dr Reddy’s, respectively.
Over the past two years, Indian pharma companies have spent $2bn in acquiring companies globally. A buoyant stock market has enabled these companies to raise over $3bn through IPOs, GDRs, FCCBs, and private equity.
While acquisitions continue to be critical for Indian pharma companies to gain critical scale, competencies, and globalise, CLSA believes that US generic companies such as Barr, and Mylan have stronger balance sheets and cash flows and are better placed than Indian companies in pursuing inorganic growth opportunities.
Valuations of target companies have increased significantly because of aggressive bidding. Actavis had first bid $1.6bn for Pliva in February ’06, but the bid war with Barr has resulted in the current offer being raised 44% higher to $2.3bn.
The CLSA report says high acquisition prices have resulted in pay-back periods being extended to over 10 years and leaving acquirers susceptible to adverse changes in market and regulatory environment.
Ranbaxy’s acquisition in RPG Aventis in France in December ’03 for $84m and Dr Reddy’s recent $570-m acquisition of Betapaharm have been cited by CLSA as two examples of acquisition pay-back periods being extended longer than initial management expectations.
Date: 10-Aug-2006
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