Ranbaxy open offer is biased

So many conjectures and assumptions surrounding impending Ranbaxy open offer.

As it exists today, if you acquire 15% or more of a target company, you have to make a compulsory open offer to other investors of the company to buyout further 20% stake from them – the idea is to give those investors an exit option at the same price. But there’s a catch. While promoters can exit their entire stake, the rest of the shareholders can only exit partially – if the acquirer does not want to buyout the entire outstanding shareholders.

In the Daiichi-Sankyo acquisition of Ranbaxy, the promoters are exiting completely at a price of Rs.737/-per share for their 35% holding. Now Daiichi-Sankyo (acquirer) has to make an open offer for another 20% at or about the same price - which is at a significant premium (Rs.194 or 35.72%) to the closing price of Ranbaxy share at Rs.543/- yesterday. So if the remaining holders of [entire 65% non-promoters] tender their shares in the open offer, only 30.7% shares offered will be accepted resulting in a rejection rate of 70%.

However, the preferential issue would also play an important role as it would change the acceptance ratio. If the preferential issue is made before the open offer then the capital base would be enhanced, affecting the acceptance ratio. Open offer on current base of 373.2 million share (would) result in buyback of 74.63 million shares (30.7% acceptance) and in case of an expanded base 419.3 million (adding preferential issue of 46.26 million), it comes to 83.85 million shares (34.5% acceptance).

I imagine a "what-if" scenario. If I hold 100 shares of Ranbaxy and tender it in the open offer, only 30 shares will be accepted by Daiichi-Sankyo at Rs.737. I will be left holding the remaining 70 shares and exposing myself to vagaries of price action post open offer, which will certainly be, down. But the promoters would have made a neat exit with full premium in their pockets. How fair is that? Well, they may explain it as “control premium” – for having stuck with the company for over 75 years and having not entered or exited like ordinary investors. Still it rankles.

Why not make the acquirers make a minimum open offer to public, as far as possible, equal to the percentage of shareholding acquired from the promoters – which is 35% in this case? That would restore a semblance of fairness. [Of course subject to Listing Agreement post offer minimum public holding criteria]

To buy 100 shares today, I have to invest Rs.54,300 @ Rs.543 a share. If I tender all these shares, only 30 shares will be accepted at Rs.737, fetching me Rs.22,110. Since this is an off-market trade, I will take a short term capital gains tax knock of 30% (+ cess) on the gain (Rs.194 x 30 shares), netting me just Rs.20,306. So my net investment on the residual holding of 70 shares will be (Rs.54,300 – Rs.20,306) Rs.33,994 or Rs.485 per share. Post offer, if Ranbaxy stock price falls below Rs.485/-, the holder is incurring a net erosion in value.

Now Ranbaxy has an EPS of Rs.17.50 giving it a P/E multiple of 31 at its current price of Rs.543. Will it be sustainable post open offer in these harried times of oil price surge, global inflation and waning sentiment in our markets? When the public offer euphoria dies down, the stock will end up quoting at an average P/E of let’s say 17, the price of the Ranbaxy share will be around Rs.290/- leaving me to stare at an erosion of 47.65% in my Ranbaxy holding.

Now you know why Ranbaxy stock price is not going anywhere even after the news of its acquisition by Daiichi-Sankyo… It’s a play on capitalism again. Loaded in favor of promoters. Remember – rich getting richer…?

Readers, what do you think?

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[Update : Thanks to reader Ratan for correcting me on the STCG error in the original post, that now stands revised.]

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Croc tears from Drug barons

Sticking with the Ranbaxy Daiichi-Sankyo deal. Industry experts get emotional.

Here goes Swati Piramal, Director at Piramal Healthcare using the occasion to beat the national drug policy –

"If the promoters of India's largest drug company felt it better to exit business after many years of attempts to make it one of the largest in the world, then there must be serious issues with our drug policy… The government and other authorities should seriously think about it. We have always maintained that Pharma companies should be allowed to invest their profits in research rather than squeezing them with more price controls for more drugs. Nicholas Piramal always felt the generic business model is unsustainable in the future…".

Oh, really…?

Since when did Indian Pharma companies commit serious investments in proprietary research (not sponsored or contract research funded by others)? They had always scavenged from expired patents of other MNCs or come up with some `spray paint' incremental innovation. I look up FY 2007-08 results of Piramal Healthcare (Nicholas Piramal). It’s just 5% of annual sales of about Rs.2850 crores. Rounding error? That is apparently including the spend from its in-house R&D division - that too is now demerged. So next year its R&D budget would be in decimals.

A better perspective could be gotten by analyzing the SG&A with sufficient break-up of payoffs to doctors (in cash or by way of free foreign junkets for their family, picking up the tab of decking up their clinics' interiors, free supply of expensive surgical equipments and other freebies) in return for liberal prescriptions.

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"World beater DNA is different, Ms.Piramal!".

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It’s Research with a capital R. Any short cuts would mean huge patent infringement lawsuit costs. [Ask Dr.Anji Reddy, he came closest]. Invest in scientists that invent (not Doctors that splurge), lab equipments and in strategic partnerships with global research institutions. I would go with the pragmatic opinion of Dr.D.S.Brar, co-architect of Ranbaxy as it stands today. He has been an insider, knew the turf, didn’t mince words nor held any moral high ground. Here he goes.

“The dynamics of the global pharma industry is changing. Generics businesses across the world [are] becoming highly competitive and companies operating only in the generic space are facing strong growth challenges. Global pharma firms want a mix of generics, a strong research and development (R&D) pipeline and bio-generics. The deal with Daiichi will help Ranbaxy to tap all the growth opportunities in the global pharma market.”

But I do understand the ROI compulsions of Ms.Piramal and her ilk. They should either stick with bulk generics and sponsor-the-doctor strategies. Or smartly cash out like Malvinder did in Ranbaxy when he felt enough is enough. For a change, I love the Government drug policy. Don’t beat the government for price controls, but for that Drug companies would be selling a strip of paracetamol for Rs.500/-. Remember Cement and Steel cartels...?

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Here’s more –

“Commercially, it is an awesome deal. However, Ranbaxy was the all-conquering Indian hero and should have been the last man standing instead of being the first to capitulate. A huge positive for Ranbaxy but a negative for Indian pharma.” says Sanjiv Kaul of M.D. of Chrys Capital (Ex-V.P - Ranbaxy.... hi...hi...hi...)

("So why did you cross over form Ranbaxy to Private Equity, Mr.Kaul?")

Instead why not give Malvinder some usable tax advise in these windfall times?

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Burning question : what will happen to Ranbaxy subs?

Japanese major Daiichi Sankyo is set to buy the promoters - Malvinder Singh and Shivinder Singh's 34.8% stake in India's largest drugmaker Ranbaxy Laboratories.

The Share Purchase and Share Subscription agreement has been unanimously approved by the Boards of Directors of both companies. Daiichi Sankyo is expected to acquire the majority equity stake in Ranbaxy by a combination of (i) purchase of shares held by the Sellers, (ii) preferential allotment of equity shares, (iii) an open offer to the public shareholders for 20% of Ranbaxy's shares, as per Indian regulations, and (iv) Daiichi Sankyo's exercise of a portion or all of the share warrants to be issued on a preferential basis. All the shares/warrants will be acquired/issued at a price of Rs.737 per share.

This purchase price represents a premium of 53.5% to Ranbaxy's average daily closing price on the National Stock Exchange for the three months ending on June 10, 2008 and 31.4% to such closing price on June 10, 2008.

Burning question – will there be open offers in its subs Zenotec, Jupiter Biosciences, Krebs Biochemicals and Orchid Chemicals?

If the deal comes through, it would mean a complete exit of Ranbaxy promoters from the company. SEBI regulations mandate any acquisition in excess of 15% in a company will trigger open offer and the acquirers will have to buyout at least 20% from the other shareholders at the same price they paid the promoter or the price computed by SEBI formula, whichever is higher.

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I like the shift in trend. Long held family stakes are no longer looked upon as non-disposable heirloom by younger generation. If an acquirer comes along offering 3x sales or at an attractive premium, the owners are willing to exit. That means there's a lot going for dealmakers like me. Long live change agents like Malvinder Singh! Hope the deal goes thro smoothly and closes fast. We don’t want a repeat of Bharti-MTN-RCom conundrum…...!!!

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[Update : Open offer will be triggered in Zenotech]

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