The Hindu Business Line : Taro pains for Sun Pharma

The stock market reaction to Sun Pharmaceutical Industries’ disclosure that Taro had terminated its merger agreement was negative, with the stock declining over 5 per cent on the news.

Perhaps, a part of the fall was due to the street factoring in the benefits accruing from the Taro acquisition; but this effect now seems to be discounted in the price. A spokesperson of Sun Pharma confirmed that they are still interested in the acquisition. But until there is greater clarity on the issue, the uncertainty could be an overhang on the stock.

This said, concerns about Sun Pharma being saddled with its existing 34 per cent stake in Taro, look unrealistic. With Taro showing operational and financial turnaround since last year, Sun Pharma could in fact book a one-time gain on its current holding. Its average acquisition price is $7.2 per share, while Taro is currently trading at around $8.75/share.

Price pangs

The deal seems to have been called off by Taro citing a ‘low’ price. Sun Pharma may feel that any price higher than $10.25/share now being offered (this is 24 per cent higher than $7.75 offered in May last year) would make the acquisition expensive.

On the other hand, Sun Pharma still has the option of pursuing the acquisition through the tender offer route. The Option Letter Agreement signed by Sun Pharma and Levitt and Moros family controlled-Taro gives the Indian company the option to purchase substantially all Taro shares owned or controlled by the members of the controlling families at $7.75 per share. However, the option is exercisable for 30 days (till June 25) following termination of the merger agreement.

Evaluating options

Meanwhile, Taro is contesting that claim and has filed an action with the Tel-Aviv District Court seeking a declaratory ruling - in case Sun really chooses to go for the ‘tender offer’ course.

If discussions between the companies do not make any headway and Sun Pharma still decides to go ahead acquiring Taro, the legal route may be time-consuming and could prolong uncertainty. But if Sun Pharma management arrives at a concrete decision earlier than the 30-day window expiry (June 25), this might turn out to be a positive development.