Sun Pharma to acquire Ranbaxy in an all stock deal

(SUNP IN; BUY; MCap: US$20,248mn; CMP: Rs588; TP: Rs684; 16% Upside)

Analyst: Rahul Sharma, +91-22‐6184 4310, rahul.sharma@karvy.com

Sun Pharma has entered into a definitive agreement to acquire 100 % of Ranbaxy in an all stock transaction. Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy. The exchange ratio represents an implied value of Rs 457 for each share of Ranbaxy. The deal has total equity value of approximately USD 3.2 bn and the deal size is approximately USD 4 bn valuing Ranbaxy at 2.2x LTM sales. Ranbaxy shareholders will own approximately 14 % of the combined entity on a pro-forma basis. The combination of Sun Pharma and Ranbaxy would create the fifth largest specialty generics company in the world and the largest pharmaceutical company in India. The company is in the process of completing the transaction by end of 2014.

The combined entity would have operations in 65 countries, 47 manufacturing facilities across 5 continents and a significant platform for specialty and generic products worldwide. The combined entity revenues on a pro-forma basis would have estimated revenues of USD 4.2 bn with EBDITA of USD 1.2 bn for the 12- month period ended December 31, 2013.

Sun Pharma expects to realize revenues and operating synergies of US$ 250 mn by the third year, post closing of the transaction. These synergies are expected to result primarily from top line growth, efficient procurement and supply chain.

Outlook & Valuations: We factor in the merger for FY16E post the completion of the deal. We have not assumed any savings in gross margins and have assumed R&D at 6.5 % of revenues. Our FY16E estimates also include repayment of Ranbaxy’s loans. The deal could be accretive in the long run as Sun Pharma has a track record of turning around acquisitions. We cut our EPS estimates by 5% to Rs 30.4 for FY 16E. We roll over our price target to FY16E from December 15. We reduce our price target by 5% to Rs 684 based on 22.5x FY2016E. We reiterate our BUY rating on the stock.