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Johannesburg - Pharmaceutical company Adcock Ingram said on Tuesday that it is withdrawing its firm intention to acquire Cipla Medpro South Africa (CMSA).
The company said CMSA has failed to give its views on the merits of the proposed transaction, despite its public undertakings to do so and has instead placed the stated opposition of its principal supplier, Cipla India, at the forefront and has attempted to discourage Adcock from proceeding with the proposed transaction.
The company added that claims have been made regarding an alleged "termination right" which Adcock is not aware was previously disclosed to the market. The JSE is now investigating, it added.
"In Adcock's view, there is now no reasonable prospect of a key suspensive condition to the proposed transaction being fulfilled," it said.
Adcock has resolved not to waive the suspensive condition and, having obtained the consent of the SRP, is not proceeding with the proposed transaction.
On April 9 2009 Adcock Ingram announced that it had notified the CMSA board of its firm intention to make an offer to acquire the entire issued share capital of CMSA.
Adcock said while it recognises the value of CMSA's relationship with Cipla India, Adcock has consistently maintained that it would seek the formal support of Cipla India at the appropriate time - which would be after the CMSA board had published its views on the merits of the proposed transaction to CMSA shareholders.
Adcock said it believes that if the CMSA board is of the opinion that the proposed transaction represents a fair opportunity for CMSA shareholders, it would be the CMSA board's responsibility
However, Adcock's CEO, Dr Jonathan Louw did meet with Cipla India's joint managing director, Amar Lulla, on several occasions over the past two years to discuss the mutual benefit of a possible merger of Adcock and CMSA.
Immediately after the publication of the firm intention announcement, Lulla was quoted in the Indian press: "...If Adcock Ingram is ready to continue with the existing arrangement, we will continue with the supplies".
This statement was welcomed by Adcock as being consistent with Louw's understanding of his prior discussions with Lulla.
On pril 17 however, Lulla stated publicly that Cipla India was not supportive of Adcock's proposed offer. On the same date, and minutes after Lulla's statement was released, CMSA issued its second Sens announcement in which it also confirmed that Jerome Smith, CEO of CMSA, was opposed to the proposed offer.
In early May, Adcock received a copy of a letter addressed to Louw by Lulla. This letter advised Adcock that both Lulla and the board of directors of Cipla India did not support the proposed transaction.
Based on the information publicly available at the time of the firm intention announcement, Adcock understood that the entire contractual relationship between CMSA and Cipla India was governed solely by a written supply agreement, concluded on or about September 26 2005.
To Adcock's knowledge, the terms of the Cipla India agreement have never been publicly disclosed by CMSA, except for a summary of salient terms contained in a limited information memorandum dated October 2005.
Having reviewed the supply agreement summary and all subsequent public communications by CMSA, Adcock was not aware of any issues in the Cipla India agreement that could prejudice the proposed transaction.
Adcock therefore noted with concern media statements attributed to Lulla that Cipla India has the right to terminate the Cipla India agreement upon a "change of management" of CMSA.
Adcock has also noted that CMSA has not publicly challenged or questioned this interpretation, and to the contrary has in its Sens announcement of May 4 implicitly confirmed the risk of such termination. The existence of this termination right would have a material effect on the market for CMSA shares and any potential offer for CMSA.
Therefore on May 19 2009, the Adcock board requested the CMSA board to clarify this issue. No response has as yet been received.
Adcock has also formally requested JSE to investigate whether the Cipla India agreement contains such a termination right, which would in effect grant Cipla India negative control over the major operations of CMSA, and whether this was properly disclosed to CMSA shareholders. The JSE is in the process of investigating the matter.
The suspensive condition pertaining to the contractual relationship between Cipla India and CMSA is contained in paragraph 7.2.3 of the firm intention announcement.
Given the lack of any substantive response from the CMSA board, as well as Adcock's concerns regarding the contractual relationship between Cipla India and CMSA, Adcock wrote to Cipla India on May 28 2009 in order to remove any uncertainty regarding the position of Cipla India in relation to the above condition.
Adcock requested Cipla India to confirm, in writing, whether the written confirmation contemplated in the above condition 7.2.3 of the firm intention announcement would be forthcoming.
On May 30, Cipla India issued a response to Adcock's letter in which it failed to provide the written confirmation requested, and also unequivocally rejected the proposed transaction.
The Adcock board therefore believes that there is no reasonable prospect of the suspensive condition being fulfilled.
Commenting on the withdrawal, CEO Jonathan Louw said: "While we are disappointed to withdraw from a transaction which had such a compelling commercial rationale, we have been placed in an untenable position.
"Given the lack of response from the CMSA board, the uncertainty over the precise nature of the contractual relationship between Cipla India and CMSA, and the potential risk of retributive action by Cipla India in respect of its commercial relationship with CMSA, the prospect of successfully completing a commercially viable transaction is no longer possible.
"We remain committed to our strategy of growing Adcock Ingram through prudent acquisition, and delivering value to shareholders".
- I-Net Bridge
