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cipla: Why Torrent Pharma is ready to go ahead with the daunting Cipla deal


Making efforts to seal a deal with Indian pharmaceutical giant Cipla, Ahmedabad-based Torrent Pharma has been trying to put together its financing. The company has reportedly been knocking on the doors of several PE funds, including Advent International, Bain Capital, Warburg Pincus and CVC Capital, for a minority stake in the bigger rival.

Torrent Pharma is interested in buying out promoter Hamied family’s 33.47% stake in Cipla and is trying to put together financing for the purchase, ET had reported.

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Cipla, which makes anti-allergic drug Cetirizine and generic versions of respiratory drugs Advair and Albuterol, had in July issued a clarification saying there is no information to disclose as per listing regulations regarding a stake sale. Torrent Pharmaceuticals had declined to comment on the acquisition. It said it has no information requiring disclosure under listing regulations. However, it did not outright deny the plans in the stock exchange clarification.

According to a Yes Securities report, at the outset, the deal would be the largest in domestic pharma at a total outlay of around Rs 60,000 crore ($7.3 bn).
The brokerage said, financially, funding a Rs 60,000 crore Cipla deal may be daunting for Torrent. So, why is Torrent going after this deal?

The deal financing
Cipla’s promoters, the Hamied family led by YK Hamied, own 33.47% of the company. The current market value of Cipla is Rs 1.01 lakh crore. At this price, the promoter stake alone is valued at Rs 33,700 crore ($4.07 billion). If the open offer for an additional 26% that has to be held under the takeover rules is fully subscribed, Torrent may end up paying a total Rs 60,000 crore ($7.2 billion) for a 59.47% stake in the 88-year-old-pharma company, India’s third-largest generics company by revenue.

“Funding a deal of this magnitude may require a combination of debt and dilution. Torrent may issue fresh equity to make debt burden more palatable – recall Sun had smartly funded Ranbaxy purchase through share swap though that may not be possible here as Cipla promoters may want an exit and not Torrent stock. In order to ensure debt/EBIDTA at ~3-4x of combined entity, our calculation suggests fresh equity issuance leading up to ~50% dilution,” Yes Securities said in its report.

The pharma company is also in talks with domestic shadow banks and mutual funds for Rs 9,000-10,000 crore ($1.1 billion) in share-backed promoter financing, ET had earlier reported. Torrent’s founders, the Sudhir and Samir Mehta family, own 71.25% as promoters. That’s amongst the highest promoter ownership in Indian pharma and they are seeking to use that headroom to dilute equity to raise leverage.Leaving no stone unturned, Torrent has also approached foreign banks, including Standard Chartered, JP Morgan, MUFG, Citi and Barclays to raise nearly Rs 32,000-35,000 crore (up to $4.23 billion) against the cash flows of the target as acquisition financing.

If done, what next for Torrent?
The deal, if done, will be one of the largest acquisitions in the Indian pharmaceutical industry with Torrent gaining a significant share in the market.

The deal will also broaden Torrent’s horizon as operationally, Cipla and Torrent have complementary presence with not much overlap, said the Yes securities report. Torrent GI portfolio is more on enzyme and Rabeprazole while Cipla is present in Esomeprazole + Magnesium Trihydrate which is complementary in nature.

It will also bring a larger US business into Torrent’s fold, a not so keen geography for its management.

However, the uncertainty over execution of the deal can put Torrent in a difficult situation.

Other players in the race
US Bain Capital has reportedly approached India’s Dr Reddy’s Laboratories (DRL) for exploring a potential deal. The two might team up to buy out the promoters of Cipla, the Hamied family.

Senior leadership from both sides met along with their advisors to discuss and formulate a strategy, ET had reported on September 5, 2023.

DRL is believed to be evaluating the opportunity and countering the offer by Torrent Pharma, currently the sole Indian strategic investor in the fray. Torrent has submitted a non-binding bid for the Hamieds’ stake in the 88-year-old company, competing against PE firms Blackstone and Baring Private Equity Asia-EQT (BPEA-EQT).

Bain Capital is also one of the private equity (PE) funds that Torrent has been in discussions with to raise as much as Rs 8,300 crore ($1 billion) as part of its financing plan for a potential $7 billion-plus buyout, the largest ever in India, ET reported September 1.

If DRL decides to participate, then not only will it enhance the competitive bidding landscape for Cipla but the combined entity would also become the leading Indian-origin pharma major at home based on their FY23 revenue of Rs 47,338 crore, with a consolidated market share of 8% (based on June 2023 Indian Pharma Market data).

The two significant bidders — Blackstone and Baring Private Equity Asia-EQT (BPEA-EQT) — have temporarily paused their pursuit of Cipla even after submitting non-binding bids earlier in August. They communicated this to the Cipla management and its advisors.


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