Taro’s board approved the proposal by Sun to take Taro private. Sun, currently, holds 66 per cent equity stake in the company. As per the agreement, Sun will pay Taro’s minority shareholders $39.5 a share upon closing of the merger.
What does this mean for Sun’s shareholders?
Since Sun’s acquisition of Taro in September 2010, Taro has been focussed on increasing market penetration, cost rationalisation (selling and administrative costs) and strengthening the R&D capabilities.
These efforts have started to pay off. Taro’s revenues jumped 32 per cent to $543 million (Rs 2,613 crore) in 2011-12 contributing 31 per cent to Sun’s total revenue. Its operating margins zoomed by 18 per cent points to 47 per cent in 2011-12. This compares to Sun’s consolidated margins of 40.7 per cent in the same period. Given Taro’s superior margin profile, 100 per cent consolidation of Taro’s numbers, should boost Sun’s margins and profitability.
But at what price? Sun’s current offer price of $39.5 a share, though 60 per cent higher than the initial offer of $24.5 made in November last year, the valuation remains reasonable at 8.6 times Taro’s one year trailing earnings. Given that the company will sustain its robust revenues and earnings growth momentum, it seems an attractive investment proposition for Sun.
However, the decision to take Taro private, on approval by shareholders, may leave the public with limited access to information pertaining to the company. This assumes significance given the bigger role Taro will play, post de-merger, in Sun Pharma’s consolidated performance.