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Cipla deal to give 7-13% accretion; $1 bn synergies to Teva in 3 years: Analysts

LiveMint logoLiveMint 09-05-2014 C.H. Unnikrishnan

Mumbai: Teva Pharmaceuticals Industries Ltd’s potential acquisition of India’s third largest drugmaker Cipla Ltd even at a valuation of $8 billion will offer a 7% to 13% accretion to the world’s largest generic drugmaker in three years’ time, estimates a Citi Research report released in the US on Thursday.

“We view this (a potential acquisition of Cipla by Teva) as an appropriate strategic and financial transaction for the company,” Citi Research analysts wrote in the report.

“However, we note that the company’s (Cipla’s) founder Yusuf Hamied is likely an unwilling seller at the reported acquisition price of $6 billion, which is 3x of its sales, based on previous reported rebuffs,” they added.

A New York-based industry analyst estimated the total synergies of the deal could be at least $1 billion.

“I think the Cipla deal makes a lot of sense for Teva as the target has great quality, low cost manufacturing…The synergies could be $1 billion, in my estimate, although $8 billion seems like a high price,” said this analyst, who did not want to be identified.

The Israeli-drugmaker Teva is apparently considering a bid for Cipla and has approached the Mumbai-based drugmaker with a proposal thrice in the last two years. Cipla had clarified that it has no plans to sell the company and hasn’t considered any such proposals in the past.

Mint reported on Thursday (8 May) that Teva could potentially buy a controlling stake (at least 57% comprises of 37% promoter’s stake and another 20% from the public) in the Indian company with with a premium of at least 20% on the existing market value. On the basis of the closing price of its shares on Wednesday (Rs382.85 on the BSE), Cipla had a market value of Rs30,739 crore, and could be valued at close to Rs36,000 crore (around $6 billion), including the premium, the report said.

According to the Citi Research report, a transaction of this nature would offer several benefits to Teva. “In our view these benefits include Cipla’s presence in the respiratory space (both pipeline and marketed products), which complements Teva’s focus on this therapeutic area; Low cost, high quality manufacturing; and a market-leading positioning in the Indian generics market (Cipla is a top-3 generics player in the Indian market).

Integration of a potential acquisition of this nature could provide the impetus for an increase in Teva’s $2 billion cost cutting programme. “We note that execution on the company (Teva)’s cost cutting programme and determination of the appropriate cost base for the company also constitutes one of its primary objectives…” said the Citi Research report.

The acquisition of Cipla would enhance and accelerate the rationalization of Teva’s supply chain, and enable the company to aggressively move a greater proportion of Teva’s manufacturing footprint to lower-cost India, the Citi Research report observes.

In addition, this potential acquisition fits with the company’s M&A strategy of augmenting its presence in its core therapeutic areas as well as expanding its presence in emerging markets, it said.

“We do not see Cipla as willing sellers at the reported acquisition price of $6 billion (3x sales), and believe that Teva would likely have to pay at least 4x sales in order to entice Cipla promoter Hamied to relinquish his controlling stake of the company,” the Citi Research analysts said.

Cipla’s market value, at Rs392.55 per share on the BSE, stands at Rs31,518.68 crore ( $5.25 billion) on Friday.

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