Investors in Piramal Healthcare appear to be applying the old logic of no smoke without fire as shares in the Indian generics manufacturer jumped 17% to Rs208.90 today, in response to a second takeover rumour within the space of three weeks, this time that French pharma giant Sanofi-Aventis is in talks to acquire a significant stake, at a 50% premium to the current share price.
Earlier this month Piramal issued a strongly-worded denial of speculation that GlaxoSmithKline was in early-stage takeover talks, which appeared to pour cold water on hopes of a deal (Glaxo given the cold shoulder by Piramal, February 10, 2009). Why the Sanofi rumour seems to be gaining more traction could be down to three factors: talks are reported to be more advanced with Sanofi having completed due diligence, the focus is more on acquiring a significant stake rather than an outright deal which may be more feasible, and importantly, as yet there has been no formal response from Piramal.
Awaiting a response
This lack of a formal response by Piramal to the Sanofi rumour is probably the main reason why the shares surged today and until the company responds, which it is not obliged to do, the chances are the shares could rise further.
Piramal issued their rejection of the Glaxo speculation within 24 hours of the rumours hitting the newswires, so investors will be keeping their ears firmly to the ground for any update from the company.
Premium too good to refuse?
As with all takeover speculation involving companies with a single majority shareholder, and Piramal’s founding family currently holds a 49.55% stake, second guessing the motives and decisions of these controlling parties is almost impossible.
So far the only signals emanating from Piramal are of a company fairly keen to grow its business organically and through specialised acquisitions of its own. The company has made five modestly sized acquisitions over the past 12 months.
This apparent reluctance of the Piramal family to relinquish control of the company is probably one of the main reasons why both the Glaxo and Sanofi takeover rumours have included speculation that a premium of 50% or higher might be offered. It would appear that any company wishing to acquire Piramal will have to make the family an offer it simply cannot refuse.
Whilst a 50% premium would be impressive in relative deal terms, the problem for the founder family and other shareholders is that this would value the shares at around Rs310, a price the stock was at as recently as October, before the credit-crunch started to really bite and hurt global stock markets.
Given that the new chief executives of both Glaxo and Sanofi have laid out a clear strategic direction for their companies based around developing a more diverse business model, with a particular focus on generating growth in emerging markets, it is hardly surprising that these companies have been linked to Piramal.
With the industry’s increasingly urgent desire to chase growth in emerging markets, concerns are growing that mounting competition for scarce high quality assets is going to drive prices to a point where decent returns will be hard to generate (The race for growth in emerging markets will be hard won, February 13, 2009). With both Glaxo and Sanofi now being linked to Piramal, the market could start to see just how desperate big pharma is for these emerging market deals.
Just yesterday Sanofi completed its €1.8bn ($2.3bn) acquisition of Czech generics group Zentiva. Commenting on the deal, chief executive, Chris Viehbacher, said “this operation is a typical example of the kind of acquisition that I want our company to make, as part of our efforts to diversify and strengthen our business in areas where there are attractive growth opportunities.”
Sanofi’s clear focus on diversification and areas with attractive growth opportunities would make an acquisition of Piramal a logical move in many respects.
Sanofi would significantly increase its share of the fast-growing Indian pharmaceutical market whilst accessing a cost effective active pharmaceutical ingredient manufacturing platform. Although given the fundamental manufacturing problems exposed at Ranbaxy Laboratories following its acquisition by Daiichi Sankyo, Sanofi would be wise to conduct a particularly rigorous due diligence process.
Whilst a deal with Sanofi, Glaxo or any other big pharma company may not materialise, given the nature and consistency of the buy-out rumours it is safe to say that Piramal is attracting serious attention and will remain the subject of further speculation until confirmed or denied.