Ahmedabad-based Torrent has reached out to several PE funds, including Advent International, Bain Capital, Warburg Pincus and CVC Capital, for a minority stake in a consortium.
In addition, it is in talks with domestic shadow banks and mutual funds for Rs 9,000-10,000 crore ($1.1 billion) in share-backed promoter financing. Torrent’s founders, the Sudhir and Samir Mehta family, own 71.25% as promoters. That’s amongst the highest promoter ownership in Indian pharma and they are seeking to use that headroom to dilute equity to raise leverage.
They are also in separate discussions with foreign banks — Standard Chartered, JP Morgan, MUFG, Citi and Barclays among others — to raise as much Rs 32,000-35,000 crore (up to $4.23 billion) against the cashflows of the target as acquisition financing. The lenders are expected to revert with funding commitment letters at the earliest, said the sources mentioned above. JP Morgan is also advising Torrent Pharma.
Bain, Advent, Warburg and CVC declined to comment.
The financing terms are still being worked on and may change in the coming days. The PE discussions too are at an early stage and may get adversely impacted if Cipla’s valuation keeps going up.Torrent is currently aiming at submitting a binding offer in early October.ET in its August 23rd edition was the first to report Torrent jumping on to the Cipla buyout race by mandating JP Morgan.
Torrent’s aggressive pitch comes at a time when two of the main rival bidders — Blackstone and Baring Private Equity Asia-EQT (BPEA-EQT), once considered firm favourites — have temporarily paused their pursuit of Cipla even after submitting non-binding bids earlier in August. This follows a 22% rise in Cipla shares since July 15. They have communicated this to the Cipla management and its advisors, said the people cited above. Blackstone declined to comment. Baring-EQT was unavailable for comment.
Cipla’s promoters, the Hamied family led by YK Hamied, own 33.47% of the company. The current market value of Cipla is Rs 1.01 lakh crore. At this price, the promoter stake alone is valued at Rs 33,700 crore ($4.07 billion). If the open offer for an additional 26% that has to be held under the takeover rules is fully subscribed, Torrent may end up paying a total Rs 60,000 crore ($7.2 billion) for a 59.47% stake in the 88-year-old-pharma company, India’s third-largest generics company by revenue. That would trump Sun Pharma’s $4 billion buyout of Ranbaxy from Daiichi Sankyo in 2014.
“The PE funds, especially Blackstone, had spent a lot of time and effort on a potential deal. They roped in consultants (from) McKinsey, held conversations with their limited partners such as several sovereign and pension funds like CPPIB for a consortium but ever since the news became public, Cipla stock has been on a tear in anticipation of a deal. This is a fully priced company, well-run, so the upside is limited for these financial sponsors who would seek 20% dollar IRR on their investments,” said an executive privy to the discussions.
At the beginning of June, when talks were initiated, the stock was at Rs 954. On Thursday, it closed at Rs 1,257.2.
However, a downward correction is expected to revive their interest.
Cipla and Torrent didn’t respond to queries.
For synergy and size
Torrent however is eagerly looking to transact its biggest acquisition ever, despite Cipla being 2.3 x its FY23 consolidated revenues and profits and plans to eventually merge Cipla post the acquisition to maximise synergies and create the second largest home grown pharma company. Together it will become number 1 in 8 of the 12 therapeutic areas.
With a current Debt : Equity of 0.9 : 1 there is some scope to also leverage further in case it has to raise debt further to fund this deal, feel analysts close to Torrent. The stock has historically been quoted at a forward P/E multiple of around 28-30 (x) and has consistently been ranked amongst the top 5 most valued companies in the pharma industry in as many years. The high promoter holding also gives flexibility to dilute equity substantially if required and yet not lose control.
Operationally too, both Torrent and Cipla have approximately 70% of their revenue contribution from chronic and sub chronic segments. While Cipla has traditionally had a focussed approach in respiratory, anti-infectives and urology segments, Torrent has been strong in cardiac, diabetes, neuro/CNS, gastro therapeutic areas. The combined portfolio, according to industry watchers could have 33 mega brands each with Rs 100 crore plus revenues and 270 brands leadership position in respective therapeutic areas.
A combined Torrent-Cipla will “catapult to the top of the leader board in India. Optimization of shared services, duplicative roles, and trimming the manufacturing footprint can unlock value and the might of the combined P&L augurs well for bolder investments in biosimilars/Specialty in the US and consumer health in India,” said Nithya Balasubramanian from Bernstein Research.
