"Tax sword hangs over Ranbaxy-Daiichi deal"

IN WHAT could play a crucial role in the Ranbaxy-Daiichi deal, ET has learnt that there is a clause in the agreement which says that the 34.8% holding of promoters will be sold through a stock exchange transaction. But this can only happen if the Ranbaxy share price touches a minimum of Rs 729 (Rs 566 on Friday) to sell the promoters’ stake at Rs 737 per share to Daiichi Sankyo. This is because Indian laws allow bulk deal transactions only at a price which is 1% more or below the market price or previous day’s closing price.

A stock exchange transaction will result in the promoters saving more than Rs 1,000 crore which they would have to pay if this was an off-market transaction. Unlike an off-market transaction which attracts a 10% long term capital gains tax, stock exchange transactions do not attract capital gains tax. The promoters will therefore hope that the Ranbaxy stock price reaches the magical Rs 729 figure before the transaction is executed. But that depends upon the movement of the Ranbaxy stock. It will decide whether the Singh family will transfer its 34.8% stake in Ranbaxy to Daiichi through direct off-market sale or through negotiated deals on stock exchanges.

Considering that the stock market has been going through a bear phase and the Ranbaxy stock on Friday reached its 3-year high level, legal circle sources are uncertain whether the Singh family will be able to conclude the proposed transaction through negotiated deals and thereby will be eligible for securities transaction tax. If not, the Singh family will have to sell its shares to Daiichi through a off-market deal, attracting huge tax liability.

“As it appears now the possibility of the Singh family ends up with paying huge capital gains tax is very high. Only advantage the family enjoys is that it has another nine months to consummate the deal,” said a legal source. When contacted, a company spokesperson said: “We cannot comment further on the deal.” It is however learnt that the company will opt for an onscreen transaction and wait for its share price to touch Rs 729 and execute the sale to adhere to the domestic market regulator Securities and Exchange Board of India’s (Sebi) rules. Plan B may be in place for off-mkt sale
“THE moment the share price touches the minimum level of Rs 729 per share, they will do the transaction on screen,” said a source.

An off-market transaction would invite a 10% basic capital gain tax, 1% surcharge and an additional 3% tax on the surcharge, a source said. But block deals done through stock market transactions will mean that Ranbaxy promoters will have to pay a nominal securities transactions tax (STT) of 0.125%. In addition, it will have bear some small costs such as broker’s fee and 12.5% service tax (on the broker’s fee), which could run into few crore, says a source

This could save the promoters from paying a total tax of around 11.3% or about Rs 1,053 crore. The promoters signed an definitive agreement to sell their entire 35% stake to Japanese company Daiichi Sankyo for Rs 9,578 crore on Wednesday.

But market watchers say Daiichi and the Singh family cannot wait indefinitely for the transaction to take place. Therefore, it is possible that there may be a Plan B which may involve off-market sale if the price does not reach Rs 729. While the official statement released by Ranbaxy and Daiichi on Wednesday said the acquisition (the stake sale plus open offer plus preferential allotment) will be completed by March 2009, Ranbaxy CEO Malvinder Singh at the press conference said he expected the transaction to be completed by December this year

Ranbaxy’s shares closed at Rs 566.90, up 4.31% from Thursday’s close of Rs 543.50, mostly driven by speculation by US major Pfizer is exploring the possibilities making a counter offer to buy the non promoters 65% stake. Meanwhile, several brokerages, post-Daiichi acquisition announcement, have either put an ‘underperformer’ or ‘sell’ rating on the pharma major.

For instance, CLSA’s fair price for the stock is Rs 525 after factoring in the change in plans regarding demerger of R&D wing which would add to research costs as also the strengthening of the balance sheet due to the preferential allotment to Daiichi Sankyo. It has given an ‘underperformer’ rating on Ranbaxy in the backdrop of no near term triggers for the stock.

"TRYST IN TOKYO LED TO DAIICHI, RANBAXY UNION"

Malvinder Went To Seek Ally For R&D Unit, Ended Up Selling Co

IT BEGAN with the Ranbaxy management looking for an investor for its R&D unit and ended with them finding a buyer for the parent company. And ironically, while Ranbaxy has been sold off, the new owners have decided to retain the R&D unit within the company.

The story goes that somewhere around March, Ranbaxy CEO Malvinder Singh and his COO Atul Sobti met with Daiichi Sankyo executives in Tokyo to explore the possibility of a partnership for its new drug discovery research (NDDR) business which it planned to demerge into a separate company. Like other Indian pharma companies Ranbaxy had announced that it had decided that it hive-off this unit and company executives were engaged in dialogue with several companies for an alliance in the R&D front.

But Daiichi had other ideas. It expressed its interest to buy into Ranbaxy. It was in the process of setting up a wholly-owned subsidiary in the country, headed by another ex-Ranbaxy executive D Vijendran The Japanese company planned to run a full-fledged operations in India and had long-terms plans for India. Ranbaxy has a strong presence in the Japanese generic market and Daiichi was aware of its strengths As Daicchi’s CEO Takashi Shoda said on Wednesday: “In India, we have only considered Ranbaxy as a prospective partner.”

It is learnt that Mr Singh was lukewarm to that proposal at that moment but when he came back to India he discussed it with his close confidants, including his younger brother and Fortis HealthCare CEO Shivinder Singh and Religare CEO Sunil Godhwani (who is also called the third pillar of the Ranbaxy promoter group). Both of them were of the view that Daiichi’s proposal could be examined and not be dismissed outright.

And so discussions began silently and at the highest levels. From Ranbaxy’s side, Mr Singh and Mr Godhwani led the negotiations and it is believed that even Mr Sobti, the second highest ranking Ranbaxy executive after the CEO, was not kept completely in the loop. “Malvinder kept his cards close to the chest,” said a company insider.

From Daiichi’s side, apart from its CEO, a key figure involved in the discussions, was the company’s board member, global strategy, Une Tsutomu. The Japanese company was advised by Nomura Securities Nomura had earlier in India advised Mitsui to pull out of $700 million Sesa Goa by selling stake to Sterlite and was also part of the consortium which helped Sterlite raise $1.2 billion ADS two years ago. As negotiations moved ahead, few senior executives had a sense about ‘some discussions’ but believed that the talks were for a strategic alliance.

Ranbaxy share prices perked up

HOWEVER, a couple of weeks before the announcement, few key executives and select board members, including ex-Ranbaxy CFO and an old Parvinder Singh-loyalist Vinay Kaul, were informed about the promoters plan to sell their entire stake.

Meanwhile, the Ranbaxy share price started going up. Whether by sheer coincidence or because of positive news flow, the company’s stock price shot up by 28% from Rs 443 on April 1 to Rs 568 on June 9, a day before the deal was announced. The rising scrip price would have definitely strengthened the negotiating position of the sellers.

Of course, Daiichi was not the only company that wanted to buy out Ranbaxy. Unconfirmed reports suggest that last year the company had rejected private equity giant Carlyle’s proposal to buy it out. GSK, too, is learnt to have proposed a buyout at a higher price than Daichi. Ultimately, the promoters did not sell-out to the highest bidder. They chose a buyer who would ensure continuity in management, provide a better fit, and not destabilise operations

"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.