Data provided by iNet BFA
Loading...
See More

Cipla to push India to raise bid

Jan 24 2013 08:44 Reuters

Shutterstock

Related Articles

Cipla to bid for control of SA affiliate

Cipla CEO and founder quits

Cipla Medpro under investigation

Date set for Cipla CEO hearing

Cipla mum on why it suspended CEO

Aucamp resigns as Cipla CFO

 

Johannesburg/Mumbai - Drug company Cipla Medpro South Africa [JSE:CMP] is expected to demand more than the $215m on offer from Indian suitor Cipla Ltd to reflect a lucrative government contract win that will increase its earnings power.

But the board of South Africa's No. 3 drug company should tread carefully in raising the stakes in this takeover deal because Cipla Ltd provides the bulk of the drugs it sells.

Cipla Ltd is to offer R8.55 per share for a 51% stake in Cipla Medpro. The Indian group supplies drugs to the Cape Town-based company, but has never owned a stake.

"It would be prudent for Cipla Medpro's board to go back to Cipla Ltd and try a get a better deal to reflect this contract win," said one banker, not involved in the process.

The Johannesburg stock market is already betting on a sweetened offer from the Indian firm, which has the second largest share of India's $13bn drug sector.

Cipla Medpro shares are about 4% above Cipla's proposed R8.55 offer price.

The Indian company's so-called "south-south" takeover bid shows the attractions of South Africa's high-growth markets and rising population for drug companies focused on low-priced medicines that are off patent.

The deal would give Cipla Ltd more clout in South Africa, where the government is introducing a national health insurance plan heavily reliant on the use of generic drugs.

Cipla swooped in November when Cipla Medpro was under a cloud after chief executive Jerome Smith quit following allegations of awarding payouts without board approval.

Its shares were then about R7.7 each, putting Cipla's offer at a premium of about 11%.

Analysts and industry rivals said Cipla Ltd's price was "opportunistic" in the wake of the CEO scandal.

"Given the inherent prospects of the business, I don't think Cipla Ltd would get 51% at this price, they are going to have to offer more," said Anthony Clark, an analyst at Vunani Securities.

Just days after Cipla's bid proposal, Cipla Medpro was awarded a R1.4bn share of a $667m government two-year contract to supply of HIV/AIDS drugs to public hospitals.

Analysts estimate Cipla Ltd stands to get revenues of $30m - $40m annually from the contract if it gains control of Cipla Medpro.    

Supply agreement

But some analysts said Cipla Medpro cannot afford to get too tough over the bid price because the company relies so heavily on the Indian firm's commitment to supply the bulk of its medicines.

The supply deal was spearheaded by Smith, the former CEO and founder of the company. There had been speculation Smith's departure could affect Cipla Medpro's relationship with Cipla.

The success of the takeover would remove these doubts and  cement the relationship.

"Cipla Medpro is worth more with a 51% shareholding, as it reduces the market's concerns regarding the sustainability of the supply agreement," said Mathew Menezes, an analyst at Avior Research in Johannesburg.

Cipla Ltd's proposed offer, worth R1.9bn, according to Reuters calculations, values Cipla Medpro at around R3.8bn.

This is less than the company's enterprise value of around R4.4bn, made up of its market capitalisation, debt and certain other considerations, according to Reuters data. Net debt was around R371m as at end-June 2012, according to a company statement. 

"Cipla, being the supplier of drugs to Cipla Medpro, is the key driver for the performance of the South African company. Therefore, I think, they will seek a better offer from Cipla rather than rejecting it," said Deepak Malik, analyst at brokerage Emkay Global in Mumbai.

Cipla's director S. Radhakrishnan said no talks had taken place around the price as it was still doing due diligence. Cipla Medpro declined to comment.

Cipla Medpro is required to update the stock market every six weeks about the takeover talks. The company gave an update on January 8 when it said talks were continuing without giving details. The next update is expected around the last week of February.  

Follow Fin24 on Twitter, Facebook, Google+ and Pinterest.

NEXT ON FIN24X

 
 
 

Read Fin24’s Comments Policy

24.com publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

Comment on this story
0 comments
Add your comment
Comment 0 characters remaining
 

Company Snapshot

We're talking about:

Small Business

A cash flow crunch often occurs in small businesses trying to balance cash coming in with cash going out. Watch this video to help you improve.
 
 

This is what banks do with your money

Gone are the days of saving cash under your mattress. Banks are now the custodians of your precious pennies, but what do they do with them?

 
 

Start saving...

Time the key for retirement saving
Dummy's guide to saving
Save money with affordable account
All about endowments

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...
Loading...