Sun Pharma-Ranbaxy Deal

The announcement by Sun Pharma on 6th April, 2014 that it would acquire 100% of Ranbaxy
Laboratories Ltd. In an all-stock transaction, valued at $4 billion, marked one of the landmark
deals of Indian Pharmaceutical industry which resulted in making Sun Pharma the largest
pharmaceutical company in India, the largest Indian Pharma company in the US and the 5th largest
generic company worldwide. On a pro forma basis, the combined entitys revenues are estimated
at US$ 4.2 billion with EBITDA of US$ 1.2 billion for the twelve month period ended December
31, 2013.The transaction value implies a revenue multiple of 2.2 based on 12 months ended
December 31, 2013.

Investor response to the announcement was lukewarm, with the stock prices moving in opposite
direction. As an immediate effect, shares of Sun Pharma went up to 2.7% in the morning trade
after the acquisition announcement while that of Ranbaxy went down by 3.1%.

The swap ratio of 8 shares of Sun pharma for every 10 shares of Ranbaxy works to the advantage
of the new entrants into Ranbaxy Laboratories Ltd. as at the prevailing price they now needs to
pay 5% less for getting the shares of sun pharma as compared to buying them directly from the
market.

There also lies a matter of uncertainty regarding the regulatory troubles facing Ranbaxy and how
soon sun pharma with a record of acquiring troubled companies at good price and later turning
them around, can resolve these troubles facing Ranbaxy. Sun pharmas good track record regarding
turning around the acquired companies can instil some hopes among the investors.

The move is seen to improve Sun pharmas global presence by providing it access to new and
emerging markets and product portfolios with Sun pharma having a presence in chronic diseases
while Ranbaxy having relevant presence in acute and OTC segments. Besides with the acquisition
of Ranbaxy, Sun pharma will add to its overall manufacturing base that is expected to reap benefits
in the long run. Overall, market perceived the deal as a win-win situation for all the parties
involved.
Sun Pharma Ranbaxy Merger /Acquisition Process:

The Sun Pharma Ranbaxy Merger /Acquisition Process can be majorly divided into two stages
viz. 1) Pre-acquisition stage and 2) Post-acquisition stage

Pre-Acquisition Stage:
I. Making Decision to Buy -
Ranbaxy Laboratories Limited is an Indian multinational pharmaceutical company with a sizeable
drug pipeline, a very promising future and has announced some big product launches in future in
the US generics market, but for frequent run-ins with the US drug regulator. It has been facing
regulatory issues for the last 3years and now has ceased to make some profits. However, the
company has a big business and huge product portfolio across various markets including India
which makes it an attractive deal for Sun Pharma to acquire this company. Daiichi (a Japanese
company), the promoters of Ranbaxy was struggling to manage its plants when came under the
US Food and Drug Administrations scanner after the acquisition. Ranbaxy was unable to
overcome these issues and increased pressure on its promoters.

Dilip Shanghvi, Managing Director, Sun Pharma has a reputation for turning around companies in
trouble by acquiring them at a good price. Sun Pharma and Ranbaxy deal has many promising
benefits as listed below. The combination of Sun Pharma and Ranbaxy:

Creates the 5th largest specialty generics company in the world and the largest pharmaceutical
company in India.
Gets leadership position in 13 specialty segments
Operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant
platform of specialty and generic products marketed globally
Ranbaxys branded derma business in the US adds to Sun's already strong derma franchise
Provides Sun Pharma access to strong human capital and reach in tier-II/III markets in India,
where it currently lacks presence, according to Edelweiss Securities.

II. Due Diligence/ Company Evaluation -

Next stage is business valuation or assessment. It involves evaluation of both the present and future
value of the target company. A thorough research on the companys capital gains, culture, market
share, capital structure, organizational structure, vendors, distribution channel, specific business
strengths and weaknesses, and brand name in the market.

This process has revealed details about Ranbaxy and the merger as mentioned below:

Sun Pharmas revenue will jump by a healthy 40% but its operating profit will rise by a just
7.5%, based on pro forma 2013 financials.
Ranbaxys profits have been hit by provisions related to foreign exchange and inventory write-
offs. Sun Pharma has said it expects to get Rs.1,550 crore in merger-related synergies by the
third year after the acquisition is completed. That is fairly significant and these savings should
be from procurement, sales growth and supply chain efficiencies.
The merger will have a negative effect on Sun Pharmas performance in the short term reducing
its operating profit margin from 44.1% to 29.2%.
In terms of size, Sun Pharma will have a pro forma 2013 revenue of Rs.25,911 crore and an
operating profit of Rs.7,577 crore, with a net profit of Rs.1,710 crore.

III. Process Initiation/ Proposal Phase -

In process initiation, acquiring company sends a proposal for a merger or an acquisition to the
target company with complete details of the deal including the commitments, amount and the
strategies. It is a non-binding offer document which is not available in open public forum. Sun
Pharma has hired McKinsey & Company to facilitate the merger of the two leading
pharmaceuticals in the domestic market. McKinsey had been given a clear mandate, including
"integration, rationalisation and capacity utilisation".

IV. Structuring Business Deal -

Once the merger is finalized i.e. either forming a new entity or the take-over, acquiring company
has to take initiatives for creating strategies to announce the launch, enhance deals credibility and
its marketing. This stage emphasize on giving a proper structure to the business deal. The road
map includes,

Regulatory approvals from various bodies such as SEBI, CCI, Stock Exchanges, High Courts
of Gujarat, Haryana and Punjab, and the stakeholders of both companies
Streamlining of teams
Resolving regulatory issues at Ranbaxy plants under US import alert
 Restructuring of product portfolios to align with the interests of Sun Pharma
Benchmark the staff-productivity ratio

V. Financial Settlement/ Exchange of Stocks -

Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy. The
exchange ratio represents an implied value of Rs 457 per Ranbaxy share and the transaction has a
total equity value of approximately $3.2bn. After the deal, Daiichi will hold a stake of about 9%
in Sun Pharma. Hence, the deal is cashless.

Post-Acquisition Stage:
I. Merger Closing Phase and Post-Merger Integration Plans to Operate the Venture -
This stage includes the process of preparing the official documents, signing the agreement on
which both the companies have agreed upon, and negotiating the deal. It includes integration of
the companies differing on various parameters. It also defines the parameters of the future
relationship between the two. After signing the agreement and entering into the venture, Sun
Pharma has various plans as listed below:

It has a detailed turnaround plan for its new purchase.

The companys basic structure and functions could be managed in the first year. There is a plan
to streamline and rationalise functions. While it will take at least two to three years to turn-
around the merged entity and to ensure contributions from the buyout.
It has prepared a three-pronged strategy which includes:
Resolution of regulatory issues
Integration of supply chain and field force for enhanced efficiency and productivity
Higher growth through synergy in domestic and emerging markets.
It is targeting to engineer the full turnaround of Ranbaxy in three-year to four-year period after
the closure of the transaction.

Valuation:

Sun Pharmaceutical Industries Ltd. and Ranbaxy Laboratories Ltd on April 06, 2014 announced
that they have entered into definitive agreements pursuant to which Sun Pharma will acquire
100% of Ranbaxy in an all-stock transaction. Under these agreements, Ranbaxy shareholders
will receive 0.8 share of Sun Pharma for each share of Ranbaxy. This exchange ratio represents
an implied value of Rs.457 for each Ranbaxy share, a premium of 18% to Ranbaxys 30-day
volume-weighted average share price and a premium of 24.3% to Ranbaxys 60-day volume-
weighted average share price, in each case, as of the close of business on April 4, 2014.

On a pro forma basis, the combined entitys revenues are estimated at US$ 4.2 billion with
EBITDA of US$ 1.2billion for the twelve month period ended December 31, 2013.The
transaction value implies a revenue multiple of 2.2 based on12 months ended December 31,
2013.

Fiscal Period March (in INR crores) 2014

Sales 13,040.30
Operating income (EBITDA) 973.20
Operating profit (EBIT) 4,97.00
taxes 343.50
NOPAT [EBIT(1-t)] 153.5.00
D&A 476.20
capex 780.90
change in NWC 326.00
Free Cash Flow - 477.70
Terminal Value
WACC 8.72%
8.72% - 477.70

Implied firm value (in INR crores) 18909.35