Valuation Clash Halts Torrent Pharma’s $7 Billion Bid for Cipla

The attempt by Torrent Pharma to acquire the Hamied family’s stake in Cipla, valued at $7 billion, has hit a roadblock due to differences in valuation, according to sources familiar with the matter; the setback has thus temporarily thwarted their plans to merge and create one of India’s largest pharmaceutical companies.

The third generation of the Hamied family had engaged in discussions with Torrent Pharma’s Sudhir and Samir Mehta family; however, both parties mutually agreed to suspend negotiations, leaving open the possibility of a revival at a later date, contingent upon bridging the 15-20% bid-ask gap in valuation.

The gap had widened due to a surge in Cipla’s stock price following the news of a potential stake sale by the Hamieds; however, the possibility of the talks resuming is still in if a common ground can be reached, especially if Cipla’s stock returns to the range of Rs 900-1,000 per share.

One source noted, “It’s pens down at Torrent’s side,” and expressed the difficulty of bridging the control premium gap. Nevertheless, they believe that re-engagement is possible once the situation cools off.

While Cipla is technically free to explore negotiations with other parties, Torrent remains the sole player in contention. Rival contenders such as Baring PE Asia-EQT, the Abu Dhabi Investment Authority, and Blackstone had backed away due to rising valuations, but they may re-enter the picture if Cipla’s stock price declines, according to sources in investment banking.

Between April and July, Cipla’s stock saw a 41% increase, peaking at Rs 1,266.45 on August 8, resulting in a market capitalization of Rs 1.02 lakh crore, shortly after the news of a potential sale became public; however, since then, the stock has declined by 7% and closed at Rs 1,183.30 per share on Monday, with a market value of Rs 95,571 crore.

While some executives suggested that the Hamied family was seeking a minimum of Rs 1,300 per share, this figure could not be independently verified. On the other hand, Torrent Pharma aimed for a valuation of Rs 1 lakh crore but fell short of the Hamieds’ expectations of Rs 1.10-1.12 lakh crore.

During Torrent Pharma’s recent earnings call, Sudhir Mehta, the chairman emeritus, referred to the reports on Cipla negotiations as “speculative.”
Over the past month, Torrent Pharma has been actively working on a substantial acquisition financing package worth Rs 60,000 crore ($7 billion), which would have marked one of the largest financing deals in recent times.

The company, founded in 1959 and known for its expansion through acquisitions, was strategically organizing funds and had plans to finalize the process by the end of September.

Torrent was working with Brookfield to secure $1-1.2 billion in mezzanine debt, backed by shares, as promoter financing; additionally, discussions were in progress with CVC Capital Partners and Bain Capital for another $1 billion in equity funding.
Simultaneously, they were in talks with multiple foreign institutional investors to raise $200-250 million each.

Sources reported that both Brookfield and CVC were willing to increase their commitments to $2.25 billion and $1.5 billion, respectively, if talks with other capital sources, including domestic shadow banks and mutual funds, failed.

Furthermore, Torrent Pharma had separate discussions with foreign banks, including Standard Chartered, JP Morgan, MUFG, Citi, Barclays, Deutsche, SMBC, Morgan Stanley, and Investec, to raise up to Rs 32,000-35,000 crore ($4.23 billion) against the cash flows of the target company for acquisition financing. JP Morgan was also advising Torrent Pharma.

Based on Cipla’s market value of slightly over Rs 1 lakh crore, Torrent estimated that they might have ended up paying a total of Rs 59,236 crore ($7.14 billion) for a 59.47% stake in the 88-year-old pharmaceutical company; this would have triggered an open offer for an additional 26% of the firm.

Torrent Pharma’s current debt-equity ratio was 0.9:1 and was expected to decrease to 0.6-0.7:1 by the end of the current fiscal year. This relatively low ratio in recent years suggested room for additional debt to finance the acquisition, and Torrent Pharma’s market value remained stable since mid-September and closed at Rs 63,428 crore on Monday.

Cipla’s Case
In the backdrop of these negotiations, Cipla had already witnessed a notable transformation under the leadership of Samina Hamied, niece of YK Hamied; the company had professionalized its management and improved its financial performance.

The company’s revenues had increased by 55% to Rs 22,753 crore in FY23 from Rs 14,630 crore in FY17; profit nearly tripled to Rs 2,802 crore from Rs 1,006 crore, and profitability improved with the Ebitda margin rising to 22% from below 18%.

Meanwhile, Debt decreased to Rs 520 crore at the end of FY23 from Rs 4,113 crore in FY17; consequently, the company’s stock price doubled over the same period.

While these negotiations unfolded, Torrent Pharma refrained from commenting on the speculation regarding the Cipla acquisition during its earnings call, with Sudhir Mehta, the chairman emeritus, stating that their capital allocation would primarily focus on India.

He emphasized Torrent’s understanding of the Indian market and its track record of integrating acquired businesses successfully; the level of leverage Torrent would take would depend on the cash flows of the acquired business, with reference to the experience of taking 3x net debt to EBITDA during the Unichem acquisition, which was subsequently reduced over a two-year period.

Mehta suggested that starting with a 3x leverage would be acceptable, provided that it would be substantially reduced to around 1.5-2x within the following two years.

The Last Bit,
The clash over valuation in the Torrent Pharma-Cipla acquisition bid and while this particular deal may be on hold, it’s evident that the hunger for growth and consolidation in the sector remains strong.

As we watch and wait to see how these valuation discrepancies unfold, one thing is certain, the pharmaceutical landscape is highly competitive, and this battle for control is far from over.