The Israeli Supreme Court today ruled in favour of Sun Pharmaceuticals and so at last brought to an end its long-running dispute with the controlling shareholders of Taro Pharmaceuticals. Sun has been trying to take over Taro since May 2007, when it emerged the ‘winner’ of a sale process organised by the controlling Levitt and Moros families. At the time, Taro was under tremendous pressure due to its high debt and weak financial performance and Taro’s CEO, Barrie Levitt, strongly endorsed Sun’s bid. However, once Sun had injected $59m in cash, and following delays in completing the takeover (resulting from outside shareholders contesting the $7.75/share valuation), Mr Levitt clearly changed his mind.
In May 2008, he wrote to Sun terminating the merger and Sun responded by launching a tender offer under which, according to the original agreement, the controlling shareholders were obliged to tender their Founders’ Shares, which control a third of the voting rights of the company. As Sun had meanwhile taken its own stake in Taro to 36% by making purchases in the market, this would have given it effective control. In order to avoid this, Taro’s controlling shareholders took Sun to court, arguing that Sun should have carried out a ‘special tender’ as prescribed by Israeli law. The lower court ruled swiftly in favour of Sun (telling the Levitts that they should have read the small print!) but the case then went to appeal at the Supreme Court, which took close to two years to come up with a 69-page judgement, backing up the lower court and awarding costs to Sun.
Sun will now complete its much-delayed tender offer at the end of which it should, in theory, control Taro. Given that Taro’s current share price is around $11.50, it is unlikely that many shareholders will tender voluntarily, so provided that Sun actually does get hold of the Founders’ Shares, it will wind up with a majority of Taro’s votes, but less than 50% of its equity. As Sun already has one quoted subsidary, Caraco, we presume that it will not make a renewed effort to take Taro private, at least until it gets a chance to look at it, but will leave the outstanding stock on the market.
According to Taro’s own reported numbers, it achieved sales of $360m in 2009 and made an operating profit of $66m, implying an EBITDA of around $88m on the basis of the depreciation and amortisation in historic accounts. Net debt was said to be $33m at the end of March 2010. Taking Sun’s tender price of $7.75/share, this would mean an EV/EBITDA for the transaction of 3.8, suggesting that Sun has got itself a bargain.
However, there are several things to bear in mind here. Firstly, the price was agreed back in 2007, when Taro was on the verge of going bust, so at the time, it was pretty generous. Secondly, Sun has paid higher prices in the meantime to acquire shares in the market, so its actual costs are different. And thirdly, Taro only very recently filed audited accounts for the years 2006 and 2007 and still doesn’t have any for 2008 or 2009, so its own estimates of the profit that it is making may not be accurate.
All in all, one has to admire the tenacity of both Dilip Shangvi, the MD of Sun and Barrie Levitt, his opposite number at Taro, even if the latter was clearly mistaken in his belief that he could take Sun’s money without holding to Taro’s side of the agreement. Assuming that Sun does now finally gain control of Taro, it is unlikely that the two will be working together for any length of time and we would anticipate changes in Taro’s management team and Board, that will allow the colourful Mr Levitt to pursue interests elsewhere.