Torrent promoters may pledge stake in power arm to fund Cipla buy

Torrent's promoters own a 53.6 per cent stake in Torrent Power, valued at Rs 18,643 crore as of Friday, which remains a crucial avenue for raising funds for the Mehtas

The Mehtas, promoters of Ahmedabad-based Torrent Group, are likely to raise funds from foreign banks to acquire their larger pharmaceutical rival Cipla by pledging a portion of their stake in their listed electricity generation unit, Torrent Power, according to bankers.

Torrent promoters currently hold a 53.6 per cent stake in Torrent Power, valued at Rs 18,643 crore as of last Friday, which remains an important avenue for fundraising for the Mehtas.

Bankers estimate that Torrent would need about $7.3 billion to acquire a 33.5 per cent stake in Cipla from its promoters and make an open offer for  26 per cent, assuming 100 per cent subscription at the current market price. In addition, Torrent promoters, who currently hold a 71.25 per cent stake in the flagship Torrent Pharmaceuticals, intend to partially divest their holdings in the company to raise funds. As of last Friday, the promoter stake in Torrent Pharmaceuticals was valued at Rs 45,162 crore.

Analysts expect Torrent promoters, along with private equity (PE) partners, to infuse approximately $2.8 billion as equity and raise debt worth approximately $4.3 billion for the acquisition.

A Torrent Group spokesperson declined to comment. A source said the group is also planning to raise funds by listing its gas distribution business by 2025, which is owned by the promoter family. The company has licences for 34 districts in India, and the potential listing would help reduce promoter-level debt required for funding the Cipla acquisition.

The group has made a non-binding offer to the promoters of Cipla and is expecting a reply soon on its offer.

Statistics submitted to the stock exchanges show that the promoters have not pledged their stake in both listed entities, thus giving them the flexibility to finance the largest transaction in the pharmaceutical industry.

Apart from Torrent, American PE major Blackstone has also made an offer for the company, but its offer is 30 per cent lower than Torrent’s at around Rs 900 per share, according to bankers.

Assuming the deal happens closer to Cipla’s current valuations, the ability of PE and other equity investors to derive a healthy return could be impacted. Hence, at Cipla’s current share price, the possibility of a strategic investor acquiring Cipla is higher than that of a private investor acquiring a majority stake, according to bankers.

Bankers said PE investors are likely to scout for opportunities to unlock value in Cipla, including the likely listing of the consumer health care franchise.

Analysts said that for Torrent, acquisitions have been a core part of its domestic growth strategy in the past decade, and in all three of its major acquisitions in the domestic market — Elder Pharmaceuticals, Unichem Laboratories, and Curatio Healthcare — the company has been able to successfully scale up brands, trim costs, and extract synergies.

“Nevertheless, Cipla’s scale is significantly bigger than any of the assets acquired by Torrent until now. Unlike Torrent’s past acquisitions, given Cipla is run fairly efficiently, we believe there are limited low-hanging fruit for synergy accretion,” said an analyst with Kotak Institutional Securities in a note.

TORRENT GAME PLAN

- May offer up to $7.3 billion to buy Cipla

- Raise $4.3 billion in debt from foreign banks to fund acquisition

- Will raise the rest as equity from private equities, own funds

- Promoters to sell stake up to 25% per cent in Torrent Pharmaceuticals

- Promoters to list gas distribution business by 2025 to reduce promoter-level debt