The Hindu Business Line : New suit adds fuel to Taro-Sun row

Sun Pharma’s acquisition target Taro Pharma commenced a new litigation recently - the second in as many months - meant to stop its would-be suitor from preventing sale of Taro’s Irish operations.

After the news was first reported on Friday, Sun Pharma stock fell nearly 5 per cent, including Rs 43 today.

The fateful acquisition has been a cause for concern from day-one after a major institutional shareholder objected to it way back in May 2007.

Although things progressed slowly over the next year, Taro claimed that it has terminated the merger agreement in May this year.

No clarity has emerged on this front yet.

To add to the ambiguity, the new litigation has reinforced fears on the street that the acquisition of Taro, on which Sun seems still very keen, will be long-drawn, if at all.

Irish trouble

After terming Sun’s offer as too low, the Israeli company’s management decided to proceed with its earlier in-principle agreement to sell off its Irish operations, which includes a multi-purpose pharmaceutical manufacturing and research facility in Roscrea, Ireland.

Taro claims it spends $0.8 million a month to maintain this facility, which is a drain on its profitability, and cash resources (which for Taro, would have been negative without Sun’s $60 million infusion a year ago).

Sun Pharma alleges that the sale of Irish operations could be a step meant to make Taro less attractive to a potential acquirer.

Taro consequently reacted by filing the second litigation.

Sun continues to be the largest shareholder of Taro with 34 per cent stake (23 per cent voting rights) and is expected to be sitting on notional gains of 25 per cent on the stake, if looked purely as a financial investment.

The year 2007-08 marked a significant year for Sun Pharma due to a sharp ramp-up in earnings.

Its core guidance for 2008-09 is 18-20 per cent for non-US and 25 per cent growth in the US.

Still, when it comes to the Sun Pharma stock, the street seems preoccupied with Taro acquisition as it was good strategic fit, allowing Sun to scale up rapidly in the US market, backed by a decent pipeline of products.