Friday, June 13, 2008

Daiichi & Ranbaxy - (Weak + Weak = Strong)

It is interesting how two organisations that are respectively struggling believe that this deal would make both of them stronger post the exercise.
Ranbaxy’s promoters have got a great deal for themselves but is this a great deal for Ranbaxy. Ranbaxy clearly has been struggling last few years with abysmal ROE and struggling to make all the acquisitions pay for themselves. The R & D pipeline hasn’t been great and the Lipitor patent appeals against Pfizer hasn’t been going its way. Ranbaxy has raised $ 440 million of FCCB’s for acquiring Terapia which is the largest generics company in Romania. The FCCB conversion price is about Rs 716 per share. Clearly the FCCB is not going to be converted into equity considering the current market price and Ranbaxy was lined up to repay this loan. The Romanian acquisition has not paid off for Ranbaxy with it getting subjected to healthcare reforms post joining the European union.
Daiichi has delivered about 6-7 % ROE over the last 3 years. Net sales for Fy 2007 in Japan declined by 10.4 % and in the US declined by 7.1%. Net Sales in the other regions increased by 48% on a smaller base. Japan still constitutes about 68 % of their sales and with the Japanese market slowing down, it needed a generics play to expand the generics market in Japan. So effectively they are hoping to buy themselves growth with the Ranbaxy acquisition.
I m not getting into the valuation bit on whether they overpaid but Ranbaxy had a great time over the years buying growth through the acquisition route and now when the time was coming to make those acquisitions work, the Singh family has magically palmed off that headache to the Japs.

The Japs who have been struggling at home believe that this is their magic bullet to deliver growth. It wouldn’t surprise me if Daiichi itself gets taken over in a few years time :-).
But then we have Pfizer to jump into the fray :-).


Mahendra Naik said...

Ninad, there is news that the promoters could save on LTCG of about 1000 cr if they do a bulk deal on the stock Exch. For this they need to take up the price to aroud 730. This could be an opportunity for investors to ride the bull in this counter.
BTW I have given a link to your blog from mine.

Ninad Kunder said...

Hi Mahendra

You are right and some of the Pfizer rumours are helping to gradually build up the momentum.

There could be a potential upside playing out, however the deal that happened today at Rs 660 is ominous in nature.

A small transaction like that can set the price for the promoters to exit and leave the retail investor in the lurch.

And thanks for adding the link.