The Hindu Business Line : Strides deal: To result in cash infusion

The web of deals entered into by Strides Arcolab, a leading exporter of generic branded pharmaceuticals with South Africa’s Aspen, will result in an infusion of cash into the former that could be used in retiring debt and acquiring new businesses.

Aspen Pharmacare has agreed to acquire a 50 per cent stake in Strides Arcolab’s Latin American operations for Rs 610 crore and greenfield generic oncology business for another Rs 170 crore.

Reducing Debts

Strides Arcolab, in turn will acquire a 51 per cent stake in Aspen’s UK based generic arm for Rs 23 crore and a 80 per cent stake in its nutraceutical arm for Rs 19.7 crore.

This would result in net cash inflows for Strides of over Rs 300 crore in 3-4 months after adjusting for acquisition costs.

The company is considering using these funds to reduce debts (excluding foreign currency convertible bonds) that stand at around Rs 360 crore. If executed, this could lead to significant reduction in interest outgo. Strides may also decide to retire a portion of the debt and utilise the remaining funds for inorganic initiatives.

Transaction values

With Aspen buying the Latin American operations at a significant premium, overall valuations for Strides’ consolidated business will receive a major boost. The transaction values the operations at over Rs 1,000 crore whereas Strides Arcolab’s market cap stands at Rs 1,251 crore.

The premium was probably paid in light of its 85 plus drug registrations in Latin America; the region being an attractive market where Aspen could leverage its substantial intellectual property portfolio.

The second transaction in which Aspen is buying 50 per cent stakes in Powercliff and Onco (wholly owned by Strides), may prove beneficial for both the parties.

Marketing Efforts

Earlier, Strides used to license products in these businesses in absence of a front-end presence. Now with the 50:50 joint venture — after development products will be transferred to the joint venture — with Aspen facilitating marketing efforts, there is no immediate impact on earnings, due to this sale, as the oncology arms are yet to commence business.

Strides will also be buying a 51 per cent stake in Aspen’s Co Pharma, a UK-based commodity generics firm.

As this firm has extended a run of disappointing results in recent times, Strides might be better placed to derive synergies through distribution capabilities.

Despite a low margin profile, this business has 50 plus products that are yet to be commercialised.

Naturelle’s extensive distribution network may help complement Strides’ existing nutraceuticals business, where it already has over 15 products.

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