Less than a month after rejecting a previous takeover bid, Taro Pharmaceutical Industries (NYSE:TARO) in August accepted long-time pursuer Sun Pharmaceutical Industries’ $39.50/share purchase price, valuing the company at just over $1.7 billion; Sun plans to take Taro private following the deal. And while the purchase at first glance appears lucrative for shareholders of the Israeli-based drugmaker, TARO shares closed the previous trading session at $40.97, suggesting that the current offer is a discount to what shareholders expect. Minority shareholders are calling the offer a gross misrepresentation of Taro’s underlying value and growth potential. So much so, that minority shareholder Grand Slam Asset Management took legal action against Taro just this Monday, and a week prior, IsZo Capital publicly questioned the validity of the company’s latest financial statements, to which Taro responded. Minority shareholders have been pressuring Taro for more information since the merger was announced, specifically for meeting minutes, a registry of shareholders, and background documents. Thus far, minority shareholders have gained little ground on the issue.
In October 2011, Sun (NSE:SUNPHARMA) offered to purchase Taro, a global provider of dermatology and cardiology products, for $24.50 per share. Sun had been building a majority stake in the company since 2007, and at the time of the offer held 66% of the ordinary shares and 100% of Taro’s founders’ shares – approximately 77% of total voting power. To the relief of minority shareholders, the offer was rejected by Taro’s recently formed Special Committee in July of 2012, after a NYSE uplisting improved TARO’s liquidity, and share price approached $40. Following the rejection, the Special Committee continued negotiations with Sun – albeit behind closed doors – and on August 12, 2012, accepted the $39.50 per share offer. Minority shareholders have since been calling for greater transparency, a more comprehensive offer from Sun, or a rejection entirely. Defying all odds, TARO has continued to climb in the wake of the announcement, reaching more than $47 in the last month and demonstrating that the market sees more value in TARO than the merger implies.
Sun’s $39.50 per share offer values Taro at roughly $1.7B, which minority shareholders say is inadequate when compared to recent acquisitions in the segment. In September, Valeant Pharmaceuticals International (NYSE:VRX) agreed to purchase Medicis Pharmaceutical (NYSE:MRX), a peer in the dermatology industry, for $2.6B, or 12x EBITDA for the last 12 months (LTM EBITDA). In a similar deal, Watson Pharmaceuticals (NYSE:WPI) purchased Actavis for $5.6B, or roughly 14x LTM EBITDA. Additionally, Bloomberg reports that eight other acquisitions in the pharmaceutical industry have averaged multiples of 14x EBITDA. Compare that to the $1.7B offer from Sun, or 5x Taro’s LTM EBITDA, and the price certainly does seem skewed in the favor of the purchasers. Even using management’s forecasted 2012 EBITDA of $267M results in a multiple of 6.4, still short of comparators. The price, says Taro, is a product of financial consultant Citigroup Global’s independent valuation (detailed here, along with management’s purposes). Minority shareholders, however, have questioned (1) the projections themselves, and (2) Citigroup’s independence as a financial advisor, as the firm receives 70% of an aggregate $8.2M advisory fee upon completion of the merger.
The deal, however, still relies on shareholder approval, subject to a few stipulations. In an extraordinary general meeting scheduled for December 6:
“…the merger agreement must be approved by: (i) 75% of the voting power of Taro present and voting at the extraordinary general meeting in person or by proxy including at least a majority of the voting power held by holders other than (A) Sun Pharma, Alkaloida, Merger Sub and their affiliates or (B) any other holders having a personal interest in the merger, present (in person or by proxy) and voting thereon (the shareholders described in (A) and (B), the “Interested Shareholders”) (unless the total voting power of the Company held by holders other than the Interested Shareholders and voting against the merger does not exceed 2% of the total voting power of the Company); (ii) 75% of the ordinary shares present and voting at the ordinary class meeting in person or by proxy; and (iii) 75% of the founders’ shares present and voting at the founders class meeting in person or by proxy.”
As Sun holds more than 75% of total voting power and all founding shares, stopping the merger will require that a majority of shareholders other than Sun Pharma, its affiliates, and “interested parties” (conflict of interest through affiliation with Sun) vote against the merger, and that the vote constitute more than 2% of the total voting power of the company. Opposed shareholders point out that Taro has taken no steps to verify the affiliation of “disinterested” voters, and that this honor-based system is inadequate. On Thursday, November 15, Taro postponed the upcoming general meeting in to “consider” the agreement.
Interestingly, Taro acknowledges the lower-than-market price: “Shareholders of Taro selling ordinary shares in the market may be able to obtain a per share price that is higher than the merger consideration for some or all of their ordinary shares.” Taro’s current share price, which has remained above $45 for the last month, suggests a stubborn refusal among investors to accept the merger valuation. Minority shareholders present a compelling case, but whether or not the group can obtain the necessary vote to block the merger remains to be seen.