After Blackstone, Baring PE, Torrent Pharma in race to acquire Hamied family's stake in Cipla: Report

As per media reports, if this acquisition goes through, it could potentially mark the most significant transaction in the pharmaceutical industry since 2014. A successful acquisition by Torrent Pharma would propel it to the position of the second-largest company in terms of revenues, surpassing even the domestic formulation business leader, Sun Pharma.

Medical Dialogues team had earlier reported that Cipla's shareholders are looking to sell a part of their total 33.47% stake in the firm to strategic investors who can oversee a revamp, help enhance capital allocation and improve operational efficiency.

Also Read: Cipla Promoters In Talk With Blackstone, Baring Asia For Stake Sale: Report

Should they decide to sell, it would trigger a mandatory open offer for an additional 26% of the company's shares. This could result in the new owner holding as much as 59.4% of Cipla's shares, a substantial ownership percentage that would overshadow Sun Pharma's notable USD 4 billion acquisition of Ranbaxy from Daiichi in 2014.

The Hamied family, who are the promoters of Cipla, own a company that boasts revenues more than double (2.3 times) that of Torrent Pharma's FY23 consolidated revenues. Additionally, Cipla's profits are 2.3 times higher, and its present market value stands at 1.46 times that of Torrent Pharma, sources familiar with the matter recently told ET.

To facilitate this acquisition, Torrent Pharma, with advisory support from JP Morgan is allegedly collaborating with private equity firms, forming a consortium. Additionally, it's been mentioned that Torrent Pharma has initiated discussions with numerous financial institutions for the necessary funding.

Concurrently, Torrent Pharma has engaged with multiple lenders to secure the necessary funding for the prospective acquisition. The company's determination is evident, as efforts have notably intensified over the past month, as indicated by one of the sources mentioned above.

Torrent has simultaneously initiated discussions with various lenders to secure the required funding for the potential acquisition. Their intention is to present an all-cash proposition for the deal. Notably, the pace of these efforts has picked up significantly over the last month, as highlighted by one of the individuals familiar with the situation.

The Mehta family, led by Sudhir and Samir Mehta, owns a substantial 71.25% as promoters of Torrent Pharma. This places them among the highest promoter ownership percentages in the Indian pharmaceutical sector. According to an anonymous source familiar with the situation, this ownership structure provides them with room to reduce their equity holdings to raise additional funds. Given the current market capitalization of Torrent Pharma, the company could potentially raise approximately Rs 26,000 crore while still maintaining around 51% ownership for the promoters. The company's current debt-to-equity ratio is around 0.9:1 and is projected to decrease to around 0.6-0.7:1 by the end of FY 2024. This ratio has mostly remained below 1 in previous years, indicating the potential for further leveraging to finance the proposed acquisition.

For Torrent Pharma, India has emerged as a dominant market due to various strategic mergers and acquisitions in recent years. These include the integration of Curatio, as well as the domestic formulations businesses of Unichem and Elder Pharma. These integrations have not only expanded the company's presence but have also contributed to improved profit margins. The current EBITDA margin of 29.5% is largely attributed to the profitable domestic business segment, with expectations for further increase to 31-32% in the coming years. In an earnings call, Aman Mehta, the whole-time director of Torrent Pharma, emphasized that M&A will remain a key strategy for the company's growth.

However, opinions on Torrent's pursuit of Cipla are divided among investors. While some see potential complementarity despite overlapping products, therapies, and markets, others are concerned about the significant leverage that the deal could introduce, creating an overhang on the stock. As of FY23, Torrent Pharma holds only Rs 572 crore in cash and bank balance.

In the Indian pharmaceutical market, Torrent ranks sixth with a 3.6% share, while Cipla ranks fourth with a 5.1% share, as per the data from MAT (Moving Annual Total) July 2023, provided by market research firm AWACS. Torrent Pharma excels in cardiovascular, central nervous system, vitamins, minerals, nutrients, and gastrointestinal segments. On the other hand, Cipla leads in the respiratory sector, is second in urology, and has a strong presence in anti-infectives and cardiac therapies.

The potential acquisition would also include a significant consumer health and trade generics business. India constitutes 44% of Cipla's sales and around 52% of Torrent's sales. Cipla boasts 15 brands with annual sales exceeding Rs 100 crores, while Torrent Pharma has over 20 brands crossing the Rs 100 crore mark in the Indian Pharma Market (IPM). Nithya Balasubramanian from Bernstein Research noted that portfolio overlap in the Indian market might limit the potential value creation for these two companies.

However, in the US market, where Torrent Pharma has faced challenges due to a lack of new product launches and price erosion, acquiring Cipla could provide a boost. Cipla has successfully expanded its US business and is on track to achieve a quarterly revenue rate of $210-$215 million, compared to Torrent Pharma's average of about $35 million per quarter. Additionally, Cipla holds the position of the third-largest drug maker in South Africa, while Torrent Pharma ranks fifth largest in Germany and is the top Indian drugmaker in Brazil and the Philippines.

"For both companies, India and select rest of the world (ROW) markets have been performing well. Cipla's strengths lie in South Africa, while Torrent has a strong presence in Brazil," an analyst who chose to remain anonymous told ET.

The Hamied family, headed by Dr. Y.K. Hamied and Mr. M.K. Hamied, constitutes the second generation of the founding family and are both in their 80s. While Dr. Hamied doesn't have children, M.K. Hamied has three children who have been engaged with Cipla in various capacities. Kamil, their son, ventured into other interests in 2015. Daughter Samina Hamied, currently serving as the executive vice-chairperson, has been steering the company recently but has refrained from operational responsibilities. Rumana Hamied, historically involved primarily in corporate social responsibility activities, completes the family lineup. Factors such as succession concerns and recent tax-related investigations have influenced their decision to consider a complete sellout.

Cipla's present market value stands at Rs 98,562.79 crore, reflecting a 16.5% increase over the past month following the public revelation of the potential sale. At this valuation, the stake held by the promoters alone is worth Rs 32,988.9 crore ($3.97 billion).