"MNCs deal a blow to local cos, lap up both big and small players"

Coca-Cola India, ACC and Gujarat Ambuja, Gokaldas Exports, Anchor...

WHILE Indian firms have been striking bulge bracket deals overseas, multinational firms are slowly but surely picking some gems in the domestic market. Over the last few years, some of the sectoral leaders have been snapped up by MNCs who have taken a short cut to hit the bulls’ eye in one of the fastest growing emerging markets in the world. While Ranbaxy’s sell-off to Japanese drug maker Daiichi Sankyo is the latest to join the list, other companies in sectors like cement, electrical products and apparel have also witnessed sell-offs.

The first big sale happened way back in 1993 when Ramesh Chauhan sold off a slew of soft drink brands to Coca-Cola India. This was followed by a series of small-time sell-offs by Indian business groups to MNCs who were looking to set a foothold in India after the economy opened up.

While there were numerous sell-offs thereafter, market leaders were not part of them in most cases and MNCs continued to snap up top players in smaller niche areas. Over the last three years, a number of blue chips and other category leaders have been bought over by MNCs or private equity funds.

For instance, Swiss cement maker Holcim struck a double deal by acquiring the top two cement makers in the country— ACC and Gujarat Ambuja. Holcim started by acquiring the stake of founder Sekhsaria and Neotia families in Gujarat Ambuja and indirectly got a significant minority stake in ACC. It later upped its stake through a public offer. The sell-off was prompted by two basic issues: right valuation and issues related to family succession.

Today, Holcim controls India’s largest cement manufacturer ACC with close to a 43% stake in the company, besides holding 46% stake in Ambuja Cement (formerly Gujarat Ambuja).

It’s not just strategic acquirers who have managed to acquire sector leaders. Last August, private equity fund Blackstone acquired country’s largest apparel maker and exporter, Gokaldas Exports. The PE player bought the promoters’ 50.1% stake in Gokaldas for $165 million and bought another 20% through an open offer in what was considered to be a overvalued transaction.

“It was in the interest of the company to partner Blackstone, whose financial strength and stakes in different companies across the world would help Gokaldas expand and also ensure an assured large orderflow to the company,” says Gokaldas Exports MD Rajendra Hinduja, whose family still holds 20% in the company and manages the company on a daily basis.

“In textile, the return on the capital employed and management effort undertaken by the company is much less compared to other industries. So it made sense for the promoters to offload stake in Gokaldas and deploy the money in businesses where the returns are much higher,” says a industry source, on why promoters, who had run the company for over 25 years, decided to cede control to Blackstone.

In another buyout last year, Japanese firm Matsushita Electric Industrial bought 80% of privately held electric equipment maker Anchor Electricals. The Mumbai-based Shah family that retains 20% stake pocketed $480 million for giving up majority stake in the firm, which has close to a one-third share in the domestic electrical products market.

"We are open to acquiring more than 50% stake"

What Takashi Shoda, President & CEO, Daiichi Sankyo Company said

Ranbaxy Laboratories will be the Indian counterpart of Daiichi Sankyo. Whatever we do in India will be done through Ranbaxy.

Daiichi Sankyo had keen interest in the Indian pharmaceutical market for a long time. In India, we have only considered Ranbaxy as a prospective partner, for a long time. This is the right to time (for the deal).

The company is open to acquiring more than 50% stake, if the open offer of an additional 20% stake is fully subscribed.

There will be no change in the management. The company will remain listed. Ranbaxy’s name is prestigious and there will be no change in Ranbaxy’s identity.

While both companies will closely cooperate to explore how to fully optimise our growth opportunities, we respect Ranbaxy’s autonomy and it will have an autonomous management.

We have presence in 21 countries but with Ranbaxy as a partner, we will increase our presence to 60 countries.

The combined Daiichi Sankyo and Ranbaxy will now rank at number 15 globally. Daiichi Sankyo alone ranked 22.

Ranbaxy Laboratories CEO and MD Malvinder Singh will continue with his current position and will take the additional role of the chairman of the board (of Ranbaxy upon closure of the deal).

We respect and believe in the management skill of Mr Malvinder Singh. We invite him to be a member of the senior global management of Daiichi Sankyo.

I would also prefer to be on the board of Ranbaxy.

Our mission is to be a global innovator company. The proposed transaction is in line with our goal. It provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast growing business of non-proprietary pharmaceuticals. Ranbaxy will also allow us to tap the emerging markets.

The complementary combination represents a perfect strategic fit and delivers a considerable opportunity for the future growth of the new Daiichi Sankyo Group.

Our existing ties with Glaxosmithkline Indian arm as a marketing partner for our hypertension drug, Olmesartan Medoxomil in India will continue.

The company is deliberating whether to have separate subsidiaries in India. It is considering leveraging the low cost manufacturing opportunities in India for its global products.

The company will fund the acquisition through debt and cash on hand.

"Daiichi gets a foothold in India"

Japanese major Daiichi Sankyo’s buyout of India’s largest pharma company Ranbaxy Laboratories has paved the way for the $8.2 billion drug discovery company to acquire one of the world’s largest generic product basket that will give it tremendous global reach. The Japanese company will now own India’s largest pharma company and will be among the largest generic companies in the world.

Daiichi Sankyo, Japan’s second largest pharma company, with little presence in India, recently started operations in the country. It recently set up a wholly-owned subsidiary Daiichi Sankyo India with an investment of Rs 25 crore. The subsidiary is headed by V Vijayendran, incidentally an ex-Ranbaxy executive. This wholly-owned subsidiary primarily focuses on cardiology and diabetology segments. It recently signed a marketing alliance with GSK India to launch its hypertension drug in India.

Previous to its merger with Daiichi, Sankyo had a small JV with an Indian partner called Unisankyo. Post merger with Daiichi in 2005, Sankyo Daiichi now holds 39.9% in the JV while the remaining 60.1% stake in this venture is held by a group of local promoters led by Jay Soman. The JV manufactures and markets bulk drugs, probiotics and few pharmaceutical products. The Japanese company has been keenly looking at launching a range of products including patented drugs in India, at a competitive price. For the same, it has been looking at outsourcing its manufacturing to Indian companies. The company can now use the manufacturing facilities of Ranbaxy for both Indian and global markets. To tap the research talent and cost advantage, the company was also looking at setting up a research facility in India.

Ranbaxy will provide the Japanese company immediate entry to Eastern Europe and Africa where the Japanese major has little presence. Daiichi will also have immediate access to thereuptic segments such as anti-infective and anti-inflammatory where Ranbaxy has a strong presence. About 20% of Ranbaxy’s sales come from emerging markets, which Daiichi Sankyo is keen to tap. Ranbaxy Laboratories has subsidiaries in 49 countries and its products are sold in over 150 countries.

"The market was all ready for the deal"

RANBAXY shares closed flat on Wednesday amid heavy trading volumes. On the BSE, the stock surged to a fresh 52-week high of Rs 592.70 intra-day, before slipping to Rs 560.80 at close, a gain of Rs 0.05 over the previous close. Around 4.04 crore shares changed hands on both exchanges combined. Market watchers attributed the flat closing of the stock to unwinding of positions built by informed circles in anticipation of the deal. Over the last one month, the stock has gained 19.5% and has been one of the best performing pharma shares. In comparison, the BSE Healthcare index has gained 7% during this period, while the 30-share Sensex is down over 9%.

Despite the open offer price of Rs 737 for an additional 20% in the company by Daiichi Sankyo, not many arbitrageurs were willing to bite. This is because, only one third of the shares submitted in the open offer process (assuming that all minority shares submit the shares) would be accepted at the stipulated price. If an investor had bought the stock purely for the purpose of arbitrage, he would then have to offload the remaining two-thirds of his position in the open market. Typically, stock prices of companies in which there is an open offer, fall sharply after that process, as arbitrageurs dump the untendered shares in the open market.

‘Ranbaxy deal a study for promoter-driven pharma cos’

THE Ranbaxy deal could pave the way for promoters of Indian pharma companies to rethink their strategies, especially relating to divestment. Using this deal as a benchmark, other promoter-driven companies could opt for a similar route to scale up operations, say analysts.

“They have to opt for the strategic investment route to bring in expertise to thrive in the rapidly changing market environment,” a pharma industry player said. Besides, innovator companies are now coming to emerging markets in a very aggressive way and that could trigger some disinvestments by Indian players. Typically, such a play would be seen by those wishing to move up to the next level.

Companies which are promoter-run would include the likes of Dr Reddy’s, Aurobindo, Cadilla, Lupin among others. According to shareholding pattern data, promoters and promoter groups hold 25.14% stake in Dr Reddy’s, 51.12% in Lupin, 72.02% in Cadila and 55.27% in Aurobindo.

Strategy apart, the issue of divestment has also been one of high emotions, especially since some of these companies have been pioneers in their field of work. Analysts reckon that the Ranbaxy deal could now make future deals less of an emotional struggle. “The final threshold has been pierced with the Ranbaxy deal. The process will be more business-like and less-emotional in subsequent deals of this nature, if and when they happen,” says Sanjeev Kaul, managing director of Chrys Capital. Hyderabad, India’s bulk drug capital, has already seen some action when the promoter of Matrix, which was valued at $1 billion, sold out to US-based Mylan, and French biotech major Bio Merieux picked up 60% stake in vaccine player Shantha Biotechnics.

"HOW THE DEAL WORKS"

"DAIICHI SNAPS UP RANBAXY FOR $4.6B Singhs To Sell Out But Malvinder To Stay CEO"

AFTER three years of swallowing some of the biggest and brightest companies and brands across the world, it was role reversal with a vengeance. A marauding corporate India watched in stunned disbelief that the promoters of Ranbaxy were actually selling out. It has virtually come as a shocker, more so at a time when Indian companies were getting used to the idea of being among the top dogs in the global corporate sweepstakes. In the largest sellout in the history of India Inc, there are some hard lessons for our promoters and CEOs — competing in a fastglobalising world, the hunter can very often become the hunted.

Malvinder Singh, the CEO of India’s largest drug maker Ranbaxy Laboratories, announced at a press conference that his family was selling its entire 34.8% stake in the company to a hitherto little-known company in India — Japan’s Daiichi Sankyo for Rs 10,000 crore ($2.4 billion) — at Rs 737 per share, a 31.4% premium over the company’s closing share price on the same day.

This transaction pegs Ranbaxy’s valuation at $8.5 billion. In all, the Japanese company will acquire 51-62% for $3.4 billion to $4.6 billion. Apart from buying the complete holding of the Singh family, Daiichi Sankyo will pick up another 9.4% in Ranbaxy through a preferential allotment as well and make an open offer for acquiring an additional 20% from other shareholders. It also has the option of acquiring another 4.9% through a preferential issue of share warrants if its holding is less than 51% after the public offer.

ET had got a whiff of this deal three months back and we even sent a questionnaire to Malvinder Singh. At that time, he vehemently denied the possibility of exiting from the company. We finally broke the story a day in advance and reported that the Singh family’s stake was being sold at a 30% premium to a Japanese company. We also first revealed more details about the deal on economictimes.com a couple of hours before the announcement on Wednesday morning.

Though the speculation about Ranbaxy owners selling off their stake goes back to the days of the late Parvinder Singh, the fact that his two sons — Malvinder and Shivinder, still in their thirties — had gone ahead and actually done it caught India Inc by complete surprise. Mahindra & Mahindra’s vice-chairman Anand Mahindra sums up the sentiment of many in corporate India: “It’s a landmark deal for the pharma industry. But I can’t help feeling a twinge of regret about an Indian multinational becoming a Japanese subsidiary.”

It was an emotional decision for Singh too, who in addition to continuing as the CEO of Ranbaxy, will next year become its chairman. “It was an emotional decision for the family, but after weighing several permutations and combinations, we felt that the deal with Daiichi Sankyo was the best for the shareholders and employees. What the family would get out of this was least of my concerns,” he said. But why did the family have to sell out? “The family had to completely exit Ranbaxy to allow Daiichi Sankyo 50.1% stake without which they would not have come on board,” said Mr Singh. He added, with current regulations preventing Indians from holding shares in foreign companies, a merger by way of a share swap was not possible. What’s in it for Ranbaxy?

SO, HOW does the change in ownership benefit Ranbaxy? For one, it will mean infusion of an additional $1 billion into the company, which will enable it to retire its debt of $500 million and become a debt-free company. The surplus cash can be used for Ranbaxy’s expansion and acquisition strategy. “We want to transform the company to the next level. Globally, an alliance between big pharma companies and generic companies is the way forward. Yes, we will become a subsidiary, but we will be a part of the $30-billion global group,” said Mr Singh.

The Ranbaxy-Daiichi combine will be the fifteenth largest drug maker in the world, with a footprint in major global markets. In addition to an expanded global reach, the combined entity will have a complementary product portfolio and a strong growth potential by effectively managing opportunities across the full pharmaceutical life-cycle; and cost competitiveness by optimising usage of R&D and manufacturing facilities of both companies, especially in India.

The acquisition is expected to be completed by the end of March 2009. On completion of the transaction, Ranbaxy is expected to become a subsidiary of Daiichi Sankyo. The deal will be financed through a mix of bank-debt facilities and existing cash resources of Daiichi Sankyo. It is anticipated that the transaction will be accretive to Daiichi Sankyo’s EPS.

Nomura Securities, the Japan-headquartered investment bank, acted as the exclusive financial advisor, and Jones Day as the legal advisor outside India. Religare Capital Markets, a wholly-owned subsidiary of Religare Enterprises, was the exclusive financial advisor to Ranbaxy and the Singh family. Addressing the press conference, Daiichi Sankyo president and CEO Takashi Shoda said: “The proposed transaction is in line with our goal to be a global pharma innovator and provides an opportunity to compliment our strong presence in innovation with a new, strong presence in the fast-growing business of non-proprietary pharmaceuticals. With this acquisition, we will be present in 60 countries compared to 21 earlier.” Few will miss the irony of Mr Singh now being a professional CEO. Wearing his shareholder’s hat, he has facilitated the exit of the company’s two previous CEOs — DS Brar and Brian Tempest. The shoe, who knows, could now on the other foot. But for a man whose family has just pocketed Rs 10,000 crore, job security will not be a matter of concern. A more thorny issue relates to his legacy. Only 36, Mr Singh, will be confronted with the same question that was repeatedly posed to him today: Was this the right time to sell out? That, however, is a Rs 10,000-cr question.