M&A Case Study :3

ABBOTT -PIRAMAL

Case study : Abbott- Piramal

• Can you give a brief outline of the case?

M&A Case study 3 : Abbott- Piramal

• The deal in brief : On May 21, 2010, Piramal Healthcare declared the execution of definitive agreements with Abbott Lab for sale of its formulation business to Abbot Healthcare Pvt Ltd ( AHPL) for total consideration of US$ 3.72 billion (9.4 times its sales) as a slump sale. The assets transferred included Piramal Health care’s manufacturing facilities at Baddi, Himachal Pradesh and rights o approximately 350 brands and trademarks and employees of the formulation business. The deal offers Abbot lab a combined market share of 7% in generic market.

M&A Case study 3: Abbot-Piramal

• Parties Involved: • Acquirers:• Abbott Laboratories, USA : incorporated in the state of Illinois,

US on March 6,1900, listed on New York , Chicago, London and Swiss stock exchanges. Abbott Lab is into discovery, development, manufacture and sale of broad line of health care products.

• Abbott Healthcare Pvt Ltd : Incorporated in India as wholly owned subsidiary of Abbott Lab and is into manufacture and sale of allopathic pharmaceutical preparations, sale of chemicals, scientific, medical and surgical equipments and nutritional products.

M&A Case study 3: Abbott- Piramal

• Sellers :• Piramal Health care Ltd :• Public limited company listed on BSE/ NSE.

Promoter holing in the co is 52.10%• Piramal Enterprises Ltd :• Affiliate of Piramal Health care, engaged in

textiles, health care, glass containers and engineering businesses.

Case study : Abbott- Piramal

• How was the deal structured?

M&A Case study :3 Abbott - Piramal

• Structure of the Deal :• See Transparency.• Transaction has been structured as slump sale u/s 293 (1)(a)

of companies Act by way of Business Transfer Agreement.• Under the deal, the formulations business which is engaged

in research, development, formulation, manufacture, sale, marketing, distribution, import and export of generic pharmaceutical products in finished form shall be transferred to Abbott Health care Pvt Ltd as a going concern by transfer of all the assets and liabilities excluding cash and cash equivalents.

Case Study : Abbott-Piramal

• What was the consideration and how it was arrived at?

M&A Case study : Abbott- Piramal• Consideration : All cash deal for US$3.72 billion ( INR 175 Billion).• Out of this, US$ 2.12 billion to be paid on closing the deal and• The balance amount is payable in four annual installments of US $ 400

million each.• Piramals are prohibited from engaging in formulation business for a

period of 8 years in India or in any emerging market ( Non Compete clause) This restriction does not apply to investment in shares of companies in competing business provided it does not exceed 5% of paid up capital of investee company.

• Piramal enterprises to give guarantee for compliance of obligations of the agreement.

• For this guarantee, Piramal Health care to pay Piramal Enterprises, an aggregate of INR 3500/- MILLION (US$ 75 million ) representing 2% of consideration received by Piramal Health care on closing of the deal.

Case study : Abbott -Piramal

• How does this become a coveted deal for Abbott?

• What are the benefits to Piramal ?

M&A Case study : Abbott- Piramal

• Commercial considerations:• Two questions : What makes formulation business a

coveted acquisition for Abbott ?• How is the deal beneficial to Piramal ?• From Abbott’s angle: As apart of strategy, Abbott wanted

to move beyond the proprietary or patented drug business.

• Competitive pressures : In Global market Abbott is ranked eighth, with revenues of US$30.7 billion ( IN 2009), whereas industry leader Johnson & Johnson with revenues of US$ 61.8 billion ranks first.

M&A case study : Abbott- Piramal

• Emerging markets : Future growth drivers :• It is expected that with saturation of growth in western

markets, emerging markets offer a significant portion of future growth in pharma industry. It is reported that Indian pharma inds has been witnessing significant growth in recent years and by 2015, it is expected to reach us$20 billion, and become one of the top 10 pharma markets, overtaking brazil, Mexico, South korea and Turkey. The huge domestic market coupled with low cost research and manufacturing capabilities has resulted in these local pharma companies being targets of global MNCs.

M&A Case study : Abbott- Piramal

• Formulation Business of Piramal Health care :During the year ended 31st March 2010, Formulation Business of Piramal reported sales of INR20 billion (US$425 Million) registering a growth of 24%. Ranked third in pharma inds by ORG IMS. Ranked first in pharma inds for growth of sales from New Products.

• Pursuant to the deal Abbott would get mfg facilities at Baddi (H.P.), 350 brands and 5000 employees – large sales force, 7% market share.

M&A Case study : Abbott -Piramal

• How deal is beneficial to PIRAMAL :• Formulation business of Piramal was valued at 9.4

times sales for FY fy2010, approx Rs. 17500 cr. ( us$3.72 billion).

• Cash pool is generated by the co and not to be paid to shareholders in this transaction. This cash is expected to be utilised for repayment of debts, more investments in R&D, increase the value of new business and/or venture into new businesses in the years to come.

M&A Case study : Abbott- Piramal

• The company will continue custom manufacturing ( both API and formulations) for third parties, critical care , over the counter consumer products, manufacture and sale of active pharma ingredients, vitamins and fine chemicals, diagnostic and medical devices, novel drug discovery and research through its affiliate, Piramal life Sciences.

• It is expected that the critical care business in which Piramal is already no 3 in Global anaesthtics market and contract manufacturing business would be the next big growth centre for the company in time to come.

Case study : Piramal- Abbott

• What were the legal and regulatory issues?

M&A Case study ; Abbott -Piramal

• Companies Act : Who should approve the Business Transfer?

• Sec. 293(1)(a) of Companies Act requires every company to obtain approval of its shareholders to undertake sale of whole or substantial part of the business – approval to be obtained by simple majority.

• Listed cos can obtain such approvals by postal ballot and it is not necessary to hold meeting of shareholders.

• Unlike sec.391-394 for M&A transactions, it does not require High Court approval.

M&A Case study : Abbott -Piramal

• Companies Act: Can Promoters participate in a resolution approving business transfer?

• Though interested directors are prohibited from voting at Board Meeting, there are no restrictions on their voting at general meeting.

• Piramals however obtained overwhelming majority including majority of total non promoter holding.

• Is it mandatory to seek approval of Creditors ?• While it is not mandatory to seek approval of majority of

creditors( unlike sec.391-94), it will depend on loan agreement signed by the company.

M&A Case study : Abbott -Piramal

• Income Tax Act : Demerger v/s Slump Sale (Business Transfer) :

• Demerger offers following tax benefits:• Capital Gains : No capital Gains on transfer of

capital assets from demerged co to resultant co as such transaction is not regarded as transfer for the purpose of capital gains.

• Carry forward and set off of losses : Carry forward or transfer of accumulated losses transferred from demerged co is avalable to resultant co.

M&A Case study : Abbott- Piramal

• Business Transfer/ Slump Sale :• Slump sale is not tax efficient and transfer of

assets from transferor to transferee could be subject to capital gains if there is gain to transferor : Shot Term / Long term.

• In this transaction long term capital gains @20% was applicable ( Tax liability approx Rs.3800 crores to be paid from the initial tranche of us$2.2 million –Rs.10000 crores)

M&A Case study : Abbott- Piramal

• Contract Act/Patents Act : How will Piramal transfer IP Rights?

• Agreement to include Transfer of IPR.• Common form : Assignment of such rights between

the parties and it is recognised by Patent acat. But requirements are:

• Such assignment to be writing with all terms and conditions

• Registration: Application by assignee within 6 months

Case Stdy : Abbott-Piramal

• Does Abbott require license to carry on formulation business? :

• The rules under Drugs &Cosmetics Act 1940, very drug manufacturer need to obtain license from the prescribed concerned.

• Transfer of assignment right does not amout to transfer of license.

M&A Case study ; Abbott-Piramal• Non compete provisions: These prohibit

Piramals • As per mutual agreement under Contract Act • Sec.27 of Contract Act.

Case study: Abbott- Piramal

• Slump Sale V/s Demerger :• Was demerger not an appropriate

alternative?

Case study: Abbott -Piramal

• Slump sale v/s Demerger :• Demerger as an alternative :• The entire formulation business can be demerged

from Piramal Healthcare and transferred as a going concern into eirther AHPL or a new company floated by AHPL or Abbott lab.

• Such a demerger would require approval of shareholders and creditors of both demerged and resultant companies and would also require approval of High Court.

Case study : Abbott-Piramal

• It would require issue of shares to all the shareholders of Piramal Healthcare based on predetermined valuation.

• Though issue of shares pursuant to scheme of re arrangement under sec.391-394 is exempt from SBI Take over code, payment of consideration by ABBOTT would have gone to shareholders of Piramal Healthcare and would not have come to Piramal Healthcare as company.

Case study : Abbott - Piramal

• What next?• What would you have preferred Slump Sale

or Demerger and Why?• Analyse post deal financial position of

Piramal• Has it gained or destroyed value for its

shareholder?