Torrent Pharmaceuticals, the frontrunner to acquire the promoters’ stake in rival Cipla, has a “fairly complementary” portfolio with leadership in certain segments where the latter’s presence is relatively weak. It also makes strategic sense for Torrent to buy Cipla, though the funding could require some heavy lifting, according to a report by Bernstein.
The complementary portfolio includes gastro-intestinal (GI), cardiovascular and Central Nervous System, among others. Torrent is much bigger in the cardiac and neuro and CNS segment, and also has presence in anti-diabetic and gynaecology, according to a report by Bernstein.
Cipla has a strong presence in respiratory and anti-infectives where Torrent does not have “much going on”. It also has a sizeable urology and ophthalmic and otologicals portfolio, along with anti-neoplast and immunomodulators, all therapies where Torrent is either not participating or has a negligible presence.
The portfolio overlap between the firms is “manageable”, it said, adding that optimisation of shared services, duplicative roles and trimming the manufacturing footprint can unlock value. Further, the might of the combined P&L augurs well for bolder investments in biosimilars and specialty in the US and in India, it added.
Torrent would have to fund the deal through a combination of 20-25% promoter stake dilution in Torrent (promoters currently hold about 71%), roping in a consortium of private equity firms or raising debt. Torrent’s market cap is about $8 billion and cash on books is at over $100 million.
“Both Cipla and Torrent are cash generating businesses and large debt should not raise many eyebrows,” it added.
However, Torrent-Cipla may have to divest 15 molecules due to meet Competition Commission of India regulations. There are only four overlaps where the combined sales share would cross the 90% mark and 29 where it will cross the 50% threshold.
Apart from Torrent, private equity major Blackstone is another firm in the race to acquire the 33.47% stake held by promoter Hamied family in Cipla. This would trigger an open offer which would imply a cheque size of about $6.75-7 billion.
“We believe Cipla is a fairly well-run organisation and Blackstone will have to get creative and spin off businesses to unlock meaningful value,” it said.
For Blackstone, funding the deal is not an issue as its funds are sizeable enough. However, it is likely that they would recruit their limited partners also to invest directly to spread the risk.
There were also reports of US buyout group Bain Capital approaching Dr Reddy’s Laboratories to jointly bid for Cipla. In a stock exchange filing, Dr Reddy’s Laboratories said it will not comment on market speculations.