Ahmedabad headquartered Torrent is working with JP Morgan to compete with global of the biggest buyout funds Blackstone and Baring Private Equity Asia-EQT. Torrent is looking to partnering with private equity funds and form a consortium but those discussions still preliminary.
Lenders tapped
In parallel, Torrent has approached multiple lenders for funding and is keen to make an all-cash offer. Work has intensified in the past month, said one of the people mentioned above.
A successful acquisition would propel Torrent Pharma to the second largest company by revenues, and in domestic formulation business it will overtake market leader Sun Pharma.The Hamied family led by Dr. Y.K. Hamied and Mr. M.K. Hamied, represent the second generation of the founding family and are both well into their 80s. While Dr. Hamied does not have children, MK. Hamied has 3 children who have all been involved with Cipla in varying capacities. Son, Kamil stepped out in 2015 to pursue other interests. Daughter Samina Hamied, currently the executive vice-chairperson, has been steering the ship in the recent past but has shied away from an operational role while Rumana Hamied, has historically been involved only in CSR activities. So succession issues and the recent tax raids have precipitated their decision to sell out entirely.As a promoter group they own 33.47% of the company. A sell out would trigger an open offer for an additional 26% of the company, which means a new owner could end up owning as much as 59.4% of Cipla, overshadowing Sun Pharma’s $4 billion buyout of Ranbaxy from from Daichii in 2014.In comparison, Sudhir and Samir Mehta and family owns 71.25 per cent as promoters of Torrent — amongst the highest promoter ownership in Indian pharma — and has “the headroom to dilute his equity to raise leverage,” said a person in the know on condition of anonymity as the talks are in private domain. “At the current market cap, the company can raise around Rs 26,000 crore & yet the promoters would continue to hold around 51% shareholding. Its current debt / equity is around is 0.9 : 1 and expected to be in the 0.6-0.7 : 1 by end of FY 2024. For most of the years, this has been lower than 1. Thus, there is scope to also leverage further to fund this deal. “
The current market value of Cipla is Rs 98,562.79 crore – a 16.5% appreciation in the last one month ever since the news of a potential sale became public. At this price, the promoter stake alone is valued at Rs 32,988.9 crore ($3.97 billion). If the open offer is fully subscribed, Blackstone may end up paying Rs 58,615.2 crore ($7.06 billion). There could be a significant control premium added too. The Cipla stock was down 1.08% at Rs 1,220 on Tuesday.
Mails to Cipla and Torrent did not elicit a response till press time on Tuesday. JP Morgan declined to comment.
Bold bet
For Torrent, India has emerged as the dominant geography — mainly driven by several M&A initiatives over a period of last few years. These included Curatio, and the domestic formulations business of Unichem and Elder Pharma. Each of these integrations have also helped drive margins – the current EBITDA margin profile of 29.5% is largely due to the domestic business which is estimated to be very profitable. Analysts expect the EBITDA margin to increase further over the next couple of years to 31-32%. In an earnings call early this month – Aman Mehta, whole time director of Torrent Pharma has made it clear that M&A would remain a key priority for growing the business.
Yet the street is divided over the benefits of Torrent chasing Cipla. While some believe despite the overlap of products, therapies and geographies, there could be complementarity, others believe the leverage will create massive overhang on the stock. Torrent has only Rs 572 crore of cash and bank balance as on FY23.
In India, Torrent is ranked number six in the Indian pharmaceutical market with a share of 3.6% and Cipla is number four with a share of 5.1%, as per MAT July 2023, according to market research firm AWACS. Torrent is strong in cardiovascular, central nervous system, vitamins, minerals and nutrients (VMN), and gastrointestinal (GI). Cipla is market leader in respiratory and ranked number two in urology, and has been strong in anti-infectives and cardiac. The potential deal also will have a large consumer health and trade generics business. India constitutes 44% of Cipla’s sales while for Torrent it is around 52%. It also has 15 brands of over Rs 100 crores per annum sales, while Cipla has 20 plus brands crossing 100 crores mark in Indian Pharma Market (IPM). “For Indian players. there might be too much of a portfolio overlap in India for this to make sense. In the domestic market, Cipla operates in multiple therapy areas and these players will likely have significant overlaps which would destroy value,” said Nithya Balasubramanian of Bernstein Research.
However, in the US, where Torrent Pharma’s business has been affected by lack of new product launches and price erosion of the base portfolio, Cipla’s acquisition will give momentum. Cipla, though late to the US market, has successfully scaled up its US business, and is now poised to clock a $210-$215 million revenue rate per quarter. In contrast Torrent does on an average about $35 million per quarter. Among others overseas — Cipla is the third largest drug maker in South Africa, Torrent Pharma has been fifth largest in Germany and number one among Indian drugmakers in Brazil and Philippines.
“For both of them India geographies have performed well. Both have their respective strengths in select rest of the world (ROW) markets – Cipla mainly in South Africa while Torrent has strengths in Brazil,” added an analyst who did not wish to be identified.
