Minority Investors in Taro Want Double the Money Sun's Offering

The purchase offer India's Sun Pharmaceutical Industries announced in mid-October for the remaining 33.7% it doesn't own in Taro Pharmaceuticals continues to arouse fierce opposition among American hedge funds.

Sun offered to buy all outstanding shares in Taro, which makes over-the-counter and prescription drugs, for $24.50 per share, totaling $368 million. Sun's offer values Taro at $1.1 billion. The price represented a 26% premium over Taro's share price on the day before the offer, and a 24% premium over Taro's average price in the previous 60 trading days before the offer.

Since then, Taro shares have since climbed to $29, which is 18% over the offer price, but that isn't the issue disturbing the investment funds. They double, or even triple, the offered price.

Last week Permian Investment Partners joined the mounting opposition to the offer, writing in an open letter to Taro's board of directors that "somewhat ironically, it was Sun's original entry into the share capital" that gave it the confidence more value could be generated from the company.

Permian says its people met with Sun's controlling owner Dilip Shanghvi last year after the company took over Taro, following a lengthy struggle.

Why Mr. Shanghvi was clammy

"While we were overwhelmed by Mr. Shanghvi's humility, we were puzzled by the contained nature of his enthusiasm for Taro's revenue growth and margin expansion potential under his leadership, particularly in light of how hard he fought to obtain control of the asset and his undeniably impressive track-record for value creation," the firm wrote.

"It is only now, in context of Sun's bid that values Taro at just 4.5 times annualized free cash flow that his choice to contain his zeal for the transaction makes sense," continued Permian. "It also explains why, despite having had ample time to do so, the board never moved the company back to a regular listing like the NYSE or Nasdaq."

The letter continued that it believed a range of $45 to $80 a share for Taro was fair and an independent adviser would think so as well.

"We intend to fervently protect the value of our investment in Taro and will not part with the shares at a level that does not reflect fair value," the letter read.

Then there's Grand Slam Asset Management, which wrote to Taro's directors two days after the offer to explain why it was rejecting it. Grand Slam urged Sun to appoint an independent expert and investment bank to conduct an unbiased auction of Taro's shares.

In its letter, Grand Slam said it estimated the fair market value of Taro shares at $48.50 - adding that it didn't think the premium offered over market price accurately reflects the company's value. It justified this by showing that Taro shares trade at a large discount against those of its peer companies when comparing trading multiples - enterprise value divided by earnings before interest and taxes (EV/EBIT ), and before depreciation and amortization (EV/Ebitda ).

The firm claimed that the discount is due to the board's failure to have the shares trade on a recognized exchange.

Grand Slam wrote that the purchase offer reflected an EV/EBIT multiple of 8.4 for Taro as opposed to an average 14.9 for it five main competitors, and EV/Ebitda of 7.25 versus a 10.9 average for the competition.

It added that Bradley Pharmaceuticals, a direct competitor, was sold at an EV/Ebitda of 15.5 and that the average multiple for recent private tenders in the same industry was 19.3.

"Evaluating legal options"

"We believe that Sun is well aware of these prevailing market multiples," said Grand Slam. "Sun's own stock trades at 24 times EV/Ebitda and 27 times EV/EBIT. Taro makes up approximately one third of Sun's consolidated business. We believe that any fair offer for the remaining outstanding public shares of Taro should be at a minimum of 15 times Ebitda - $48.50 a share."

Raging Capital Management called on the board to form a committee, composed of members independent from Sun, to evaluate all strategic alternatives to maximize shareholder value. It pointed out that Taro's $1.1 billion company valuation under the offer is equivalent to just 10.1% of Sun's value, but that Taro contributes 30.9% of Sun's Ebitda and its shares should be priced accordingly, at $71.60 apiece.

"We fear that Sun is now trying to use its leverage to squeeze out the minority shareholders at a price that deprives them of the full value of their investment," said Raging Capital. "Unless the board commits itself to action consistent with its fiduciary duties, we remain vehemently opposed to the acquisition proposal. We are currently evaluating all legal options and reserve the right to take any action necessary to ensure that the company is run in a manner consistent with the best interests of minority shareholders. We will do all we can to ensure that shareholders receive the maximum value for their investment in the company."

Taro produces prescription and over-the-counter medications, mostly for the treatment of skin conditions.