Krensavage Asset Management Remains Opposed to Sun's Predatory Bid for Taro

Rhea-AI Summary

Krensavage Asset Management remains opposed to Sun Pharmaceutical Industries Ltd.'s bid to take Taro Pharmaceutical Industries Ltd. private, citing the inadequate offer that undervalues Taro's assets and cash generation. The bid is seen as a 9% discount to the value of Taro's tangible assets, with concerns raised about the special committee's responsibility in neglecting Taro's value and its ability to generate cash. Sun's offer is also criticized for being lower than Taro's stock repurchase price in 2019. Krensavage Asset Management, as the second-largest Taro shareholder, continues to decline support for the transaction.

Positive

• Krensavage Asset Management holds 640,735 shares of Taro, making it the second-largest shareholder
• Sun's bid is a 9% discount to the value of Taro's tangible assets
• Taro's liquidation value likely approaches $47 a share
• Taro's special committee is criticized for neglecting Taro's carcass value and cash generation potential
• Sun's offer is lower than Taro's stock repurchase price in 2019

Negative

• Sun's bid is seen as inadequate and predatory by Krensavage Asset Management
• Taro's special committee is accused of embracing a transaction that fails to recognize Taro's value and ability to generate cash

Financial Analyst

The opposition by Krensavage Asset Management to Sun Pharmaceutical Industries Ltd.'s bid for Taro Pharmaceutical Industries Ltd. highlights the complexities involved in mergers and acquisitions, particularly when it comes to valuation disputes. The bid's valuation at a 9% discount to Taro's tangible assets raises questions about the fairness of the offer, especially given Taro's significant cash generation over the past decade. Investors should closely monitor the outcome of this opposition, as it may set a precedent for minority shareholder influence in acquisition negotiations and could affect Taro's share price volatility in the short term.

Furthermore, the reference to Taro's historical cash generation and liquidation value suggests a potential undervaluation, which could lead to a reassessment of the intrinsic value of Taro by the market. This scenario may influence the negotiation dynamics and could result in a revised offer that better reflects Taro's financial health and future cash flow prospects.

Market Research Analyst

Comparing Taro's financial multiples with those of its peers reveals a significant discrepancy. Taro's gross profit multiple is notably lower than the industry average, suggesting that the market may be undervaluing the company. For stakeholders, this discrepancy could indicate an opportunity for value realization if the acquisition does not proceed and Taro's financial performance aligns with industry norms. In the long term, if Taro remains independent and improves its financial ratios, there could be upside potential for investors.

It is also important to consider the strategic implications of the acquisition for Sun Pharmaceutical. If the bid is successful, Sun could potentially leverage Taro's assets and cash flow to strengthen its market position. However, a failure to acquire Taro at the proposed price could lead to a search for alternative acquisition targets or strategies to enhance Sun's portfolio.

Legal Expert

The requirement for approval from the majority of Taro's minority shareholders introduces a legal dimension to the acquisition process. This requirement serves as a protective measure for minority investors against potential undervaluation in take-private deals. The outcome of this bid could have broader legal implications for similar future transactions, as it may influence the standards for fairness opinions and the role of special committees in representing minority shareholder interests.

Additionally, the historical context of Sun's previous attempts to acquire Taro and the role of investment banks in valuing the company could come under legal scrutiny. This situation emphasizes the importance of transparent and rigorous valuation methodologies in M&A activities to ensure that all shareholders' rights are respected and that the offer price is justifiable.

NEW YORK, Jan. 30, 2024 /PRNewswire/ -- Krensavage Asset Management today sent the following message to a special committee evaluating Sun Pharmaceutical Industries Ltd.'s bid for Taro Pharmaceutical Industries Ltd.

Krensavage Asset Management LLC
610 Fifth Avenue
Suite 301
New York, NY 10020
info@krensavage.com 

Taro Special Committee
Linda Benshoshan
linda@lindabs.co.il

Dear Linda,

As the largest minority shareholder¹ of Taro Pharmaceutical Industries Ltd. (NYSE: TARO), Krensavage Asset Management LLC remains opposed to Sun Pharmaceutical Industries Ltd.'s inadequate bid to take Taro private.

Since we expressed our dismay in an open letter July 19, Sun, a 78.5% Taro shareholder, hiked its bid 13% to $43 a share, valuing Taro at $1.6 billion. Sun on May 26 disclosed a $38 lowball bid for Taro.

Sun's new offer amounts to a 9% discount to the value of Taro's tangible assets, primarily $35 a share of net cash. Including real estate and other hard assets, Taro's liquidation value likely approaches $47 a share².

Sun is valuing Taro at $310 million, net of cash, for a business that generated $2.4 billion of cash in the 10 years ended March 31, the close of Taro's most-recent fiscal year.

We question if the special committee Taro appointed to consider Sun's bid is neglecting its responsibility by embracing a transaction that fails to recognize Taro's carcass value, much less its ability to generate cash. None of Taro's board members own shares of the company, according to a November 17 proxy. 

Taro shares would sell for $77 a share—before a takeover premium— if they traded at 4.9 times gross profit, the average multiple of six peers.

Taro Peer Values
Company	Market Capitalization1 ( $ millions )	Net Cash ($ millions)	Enterprise Value  ($ millions)	Revenue Multiple2	Gross Profit Multiple2	Free Cash Flow Yield over Enterprise Value3
Teva Pharmaceutical Industries Ltd	11,520	-17,725	29,245	1.9	3.9	2 %
Perrigo CompanyPlc	4,481	-3,488	7,969	1.8	4.8	4 %
Viatris Inc	13,839	-17,075	30,914	2.0	4.6	7 %
Sandoz Group AG4	14,261	-4,592	18,853	2.0	4.0	3 %
Amneal Pharmaceuticals Inc	1,606	-2,602	4,209	1.7	4.5	3 %
Amphastar Pharmaceuticals Inc	3,027	-338	3,365	4.7	7.8	4 %
Mean				2.3	4.9	4 %
Taro Pharmaceutical Industries Ltd	1,616	1,306	310	0.5	1.0	28 %
1Share prices as of 1/17/23, except for Taro which uses $43 offer price
2 Latest quarter annualized
3Trailing 12 months
4Sandoz Group AG financials are as of 6/30/23

Taro in an October 26 earnings report disclosed $6.1 million of spending primarily for the special committee's work including the hiring of an investment bank that has deemed Sun's bid fair to Taro's shareholders.

Taro's bankers have lowballed before. In August 2012, when Sun was pursuing Taro in a bid that failed, an investment bank Taro hired to value the company relied on management's projections it would generate net income of $835 million between 2012 and 2016³. Taro in fact generated $2.1 billion of net income.

With a market value of $40.2 billion⁴, Sun can pay more. Sun is offering, net of Taro's cash, $67 million for the roughly 8.1 million Taro shares it doesn't own⁵. In December 2019, Taro paid $91 a share to repurchase its stock in a tender offer – more than twice Sun's current bid.

Sun requires approval of the majority of Taro's minority shareholders. Unless Sun acknowledges Taro's value, we continue to decline to support the transaction.

Michael P. Krensavage
Managing member
Krensavage Asset Management LLC

Notes:

¹Krensavage Asset Management's 640,735 shares of Taro on September 30 make it Taro's No. 2 shareholder, according to Bloomberg.

²Tangible assets reflect $1.8 billion of shareholders' equity less $17 million of goodwill. Weighted-average shares outstanding totaled 37.6 million in the quarter ended December 31.

³Presentation to special committee August 12, 2012:

sec.gov/Archives/edgar/data/906338/000094787112000742/ss157108_ex99c2.htm

⁴Bloomberg lists Sun's closing market capitalization on January 29 as $40.2 billion.

⁵Taro had 37,584,891 weighted-average shares outstanding in the quarter ended December 31. Sun controlled 29,497,813 shares of Taro according to Sun's Jan. 17 13D/A.

Contact:

David W. Walbert
Senior Analyst
Krensavage Asset Management LLC
Office: (212) 706-0589
info@krensavage.com

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SOURCE Krensavage Asset Management LLC

FAQ

What is the ticker symbol for Taro Pharmaceutical Industries Ltd.?

The ticker symbol for Taro Pharmaceutical Industries Ltd. is TARO.

What is the value of Sun Pharmaceutical Industries Ltd.'s bid for Taro?

Sun Pharmaceutical Industries Ltd. hiked its bid 13% to $43 a share, valuing Taro at $1.6 billion.

How much did Taro pay to repurchase its stock in a tender offer?

In December 2019, Taro paid $91 a share to repurchase its stock in a tender offer, which is more than twice Sun's current bid.

What is the liquidation value of Taro's assets?

Taro's liquidation value likely approaches $47 a share.

What is Krensavage Asset Management's stance on Sun's bid for Taro?

Krensavage Asset Management remains opposed to Sun Pharmaceutical Industries Ltd.'s bid to take Taro Pharmaceutical Industries Ltd. private, citing the inadequate offer that undervalues Taro's assets and cash generation.