Sun Pharma opts out of Meda race as rupee falls

Sun Pharmaceutical Industries Ltd withdrew from the race to buy Swedish firm Meda Pharmaceuticals for up to $6 billion (Rs 36,190 crore today) following a sharp fall in the rupee in June, a patent settlement worth $550 million in the US and an extremely negative stock market reaction to Apollo Tyres' US acquisition, bankers said.

City-based Sun Pharma, which has a cash balance of $1.3 billion as on March this year including its subsidiary Taro Pharmaceutical Industries' cash, was in talks with banks to raise funds for the acquisition in June.

"But the rupee's sharp fall in June has postponed the overseas acquisition plans of many Indian companies, including Sun. Now, we will see more inbound investments than outbound," a banker directly involved with the proposed transaction said. This bank was approached by Sun for funding the acquisition.

Both Meda and Sun Pharma have denied to the stock markets that they are in talks for a deal.

The rupee fell to an all-time low of 60.7 a dollar on June 26 after US Federal Reserve chairman Ben S Bernanke said on June 19 its monetary stimulus might end next year.

According to Dealogic, in the first six months of 2013, outbound transactions from India fell to $5.7 billion from $13.2 billion in the corresponding period last year.

Apollo Tyres' $2.5 billion acquisition of US-based Cooper Tires resulted in its angry investors pulling its shares down by 32 per cent since the deal was announced last month.

"The investor reaction to Apollo's acquisition has taken everyone by surprise. This shows other shareholders are not comfortable with high cost acquisition with high debt component without any immediate, visible benefit to the company. Sun shareholders will also react similarly," added the banker, who did not want to be named.

Sun Pharma's stock is one of the best performing stocks with a 39 per cent rise since January this year. The scrip closed at Rs 1,019.95 on Wednesday, up 1.25 per cent from the previous close, while the benchmark Sensex shed 1.47 per cent to 19,177.76.

Besides, Sun Pharma has to pay a hefty $550 million settlement fees to Pfizer to settle a US federal trial for the infringement of patent laws over Protonix. Analysts say it reduces Sun Pharma's own ability for any immediate big ticket acquisition and even smaller deals.

Analysts say Sun Pharma holds a significant portion of its cash in Indian currency and even if 50 per cent to be held in the dollar terms, it shaves of $20 million from the company's cash balance due to the rupee depreciation. Thus, the settlement would take away 90 per cent of Sun Pharma's accessible cash balance of $620 million.

The drug maker has also told analysts tapping into Taro's $530 million cash requires the latter's approval, and hence, the company may have to take a higher-than-anticipated leverage on its books for any medium to big ticket acquisition.

As its own cash balance would slide to sub-$100 million after paying the settlement fees to Pfizer, barring the cash flows over the next three quarters, it will limit Sun Pharma's near term ability to facilitate a buyout, say analysts. And, hence, the plan to drop out from the race to buy Meda.