How much is Taro Pharmaceutical Industries (Nasdaq: TARO) worth? That depends who you ask. The company, its consultants Blackstone, and Merrill Lynch, which attested to the fairness of the deal in its takeover by India's Sun Pharmaceutical Industries, say it's $7.75 per share, or $230 million. That's fair, they say.
Back in 2004, Taro traded on Wall Street at $60 per share. If you held onto your shares since then, you're probably quite upset with that evaluation. Even if you bought at much less, you probably feel that Sun's offer is on the low side. Surely the Israeli drug company could have extracted a few more dollars per share?
That is evidently what they feel at Templeton, a U.S. investment fund that strongly opposes the deal. Templeton owns 9% of Taro's stock, having bought it for higher prices in the last year.
Papers that Templeton filed with the U.S. Securities and Exchange Commission show that it from May to July 2006 it bought Taro shares for $10 to $12.50, and now it's trying to foil the Sun takeover,
Could it be that Templeton just can't accept that it demonstrated poor judgment? Its lawyer Pini Rubin, who's representing it in an Israeli court, says his client believes the fair value for Taro shares is $18. "The company will be worth much more than the ridiculous prices named," Rubin argues.
Hm - $18? Truth be told, it's hard to understand Templeton's assertion. One would think that Taro's situation is so dire that Templeton and the other opponents to the deal would leap at it.
Why? Well, the initial figures indicate that in 2006, Taro lost a tremendous sum, in the range of $95 million to $120 million, on revenues in the range of $180-200 million. That's down 40% from its revenues in 2006, when it netted $5.7 million.
What happened? Several thing contributed to its deterioration, including eroding prices for its product lines, and its failure to balance that by launching new products by the last quarter of 2006.
Also, an inquiry found that Taro had indulged in "channel-stuffing", which means it induced its distributors to order more than they needed at any given time, and it can't continue doing that. The company admits that it scaled back shipments to distributors in 2006 because they were crammed with inventory.
So Taro's troubles aren't confined to gigantic outlay on lawyers and accountants. It does have those costs, but it has a real problem with management. It also faces fierce competition in the generic drugs market, which is hurting bigger and more stable companies, even the great Teva (TASE, Nasdaq: TEVA) itself. The competition will just get worse and in its weakened condition, Taro will have trouble holding its own.
And then there are the liquidity troubles. It owes $240 million to banks and bondholders and has just $11 million in cash. Sun will be infusing $45 million, in part to pay off bondholders, an infusion that Taro desperately needs.
If the transaction falls through, will Taro last long enough to find another buyer? To renegotiate price and close a new deal? Possibly not; the banks are breathing down its neck and don't think that Citi in New York will hesitate to impose sanctions if Taro defaults.
Templeton hopes to raise the price for the deal, which is legitimate: that's how it goes when one party wants to buy low and the other wants to gain something from the deal. Templeton may well succeed in torpedoing the deal at the general assembly of shareholders on July 23, and Sun may well refuse to sweeten its offer and go home to India. That is the danger to Taro.
