Raging Capital Sends Letter to Taro Pharmaceutical Board of Directors in Opposition to Inadequate Acquisition Offer by Sun Pharmaceutical
Calls on Board to Form Independent Special Committee and Retain Independent Advisors to Evaluate all Strategic Alternatives to Maximize Shareholder Value
PRINCETON, N.J., Nov. 3, 2011 /PRNewswire/ -- Raging Capital Management, LLC ("Raging Capital"), one of the largest unaffiliated shareholders of Taro Pharmaceutical Industries Ltd. ("Taro") (OTC: TAROF), announced today that it delivered a letter to the Board of Directors of Taro opposing the October 18, 2011 proposal by Sun Pharmaceutical Industries Ltd. ("Sun Pharma") to acquire the remaining outstanding shares of Taro for $24.50 per share. In the letter, Raging Capital agreed with the views previously expressed by Grand Slam Asset Management and stated that the proposed consideration is grossly inadequate and fails to provide full and fair value to Taro's minority shareholders. Raging Capital called on the Board to form a special committee composed of members who are truly independent from Sun Pharma and retain independent advisors to explore and evaluate all strategic alternatives to maximize shareholder value.
The full text of the letter follows:
November 3, 2011
Dear Members of the Board of Taro Pharmaceutical Industries Ltd.:
As one of the largest unaffiliated shareholders of Taro Pharmaceutical Industries Ltd. ("Taro" or the "Company"), we are writing to you to express our serious concerns with the October 18, 2011 proposal of Sun Pharmaceutical Industries Ltd. ("Sun Pharma") to acquire all of the issued and outstanding shares of Taro, not currently held by Sun Pharma, at a price of $24.50 per share, in cash (the "Acquisition Proposal"). We believe the proposed consideration of $24.50 is grossly inadequate and is not in the best interests of Taro and its minority shareholders. It is incumbent upon the independent directors in accordance with their fiduciary duties to take all actions necessary to protect the best interests of shareholders and ensure that shareholders receive full and fair value in any proposed transaction.
We agree with the position expressed by another significant Taro shareholder, Grand Slam Asset Management, LLC ("Grand Slam"), in its October 18, 2011 letter to the Board urging the rejection of the Acquisition Proposal. Grand Slam's analysis demonstrates that the price offered by Sun Pharma is grossly inadequate and that the financial analysis upon which Sun Pharma's proposal is based is fundamentally flawed. Much like Grand Slam, we feel that a proper valuation of Taro's shares cannot be based solely on the current market price of Taro's shares in light of the steep discount at which Taro's shares trade as a result of the Board's failure to list on a nationally recognized exchange. A fair price for Taro's shares should be consistent with the trading multiples for publicly traded generic pharmaceutical companies and the multiples in merger and acquisition transactions for publicly traded generic pharmaceutical companies, which implies a per share price well above the $24.50 offered by Sun Pharma.
A look at the relative valuations of Taro and Sun Pharma provides further substantiation that the Acquisition Proposal grossly undervalues Taro. Based on an average share price for the sixty days preceding the Acquisition Offer, Sun Pharma's enterprise value was $10.08 billion, or 24 times trailing twelve-month earnings before interest, taxes, depreciation, and amortization (EBITDA). On a fully consolidated basis, Taro contributed a substantial 30.9% of Sun Pharma's pro-forma EBITDA. In contrast, Sun Pharma's offer of $24.50 per share is equivalent to just 10.1% of Sun Pharma's enterprise value. The relative EBITDA contribution from Taro indicates that full value would have to be $71.60 per Taro share in order to equal 30.9% of Sun Pharma's enterprise value.
In fact, the movement of Sun Pharma's own stock price following the announcement of the Acquisition Proposal is telling. Typically, when an acquirer is deemed to have paid a "full and fair price" for a target, the acquirer's shares trade down. In this instance, however, as of October 31, 2011 the price of Sun Pharma's common stock was actually up more than 9% since the announcement of the Acquisition Proposal, demonstrating that the market believes Sun Pharma is getting Taro at below value.
Sound corporate governance and well-established principles of fairness and equity in both Israel and the U.S. mandate that the Board set up a mechanism for the evaluation of the Acquisition Proposal that would frustrate any coercive attempts by Sun Pharma to take advantage of Taro's minority shareholders. We expect Taro to follow through with its stated intention of forming a special committee to review the Acquisition Proposal. It is imperative that such a special committee is composed of members who are truly independent from Sun Pharma. The need for such a disinterested special committee is heightened by the fact that many of the members of the current Board were appointed by Sun Pharma in September 2010 in connection with the transaction through which Sun Pharma gained a controlling stake in the Company, including the letter agreement and settlement agreement between Sun Pharma and the families of the Company's founders. Furthermore, such a disinterested special committee should have a stated purpose to fully protect the minority shareholders of Taro and a clear mandate to evaluate and take all appropriate and available steps to ensure that the rights of Taro's minority shareholders are not trampled on.
Equally as important as the composition of any special committee that is formed is the scope of its authority. In this regard, we believe it is critical that the special committee have the authority to explore all potential transactions, and not be limited to simply negotiating the terms of a transaction with Sun Pharma. We think it important that the Special Committee be specifically authorized to contact other potential strategic and financial bidders prior to entering into any agreement so that the value of the Company in any sale can be maximized.
Another important step in the process is retaining expert, independent advisers to assist the special committee in its deliberations. The special committee should have no problem retaining top tier, independent advisers experienced in transactions of this size and complexity. While we do not presume to recommend any particular investment bank, we do expect that the special committee will ensure that the firms selected have no prior relationship with Sun Pharma.
Sun Pharma's prior history with Taro dating back to 2007 and the circumstances under which Sun Pharma gained a controlling stake in the Company give us even further pause for concern that the interests of minority shareholders are not being properly looked after. Sun Pharma and Taro entered into a merger agreement in May 2007 pursuant to which Sun Pharma would acquire Taro for $7.75 per share. The proposed transaction was met with opposition from shareholders and after it became clear that the merger may not be approved by shareholders and after the Board concluded that a revised $10.25 offer from Sun Pharma was inadequate, Taro announced on May 28, 2008 that it had terminated the Merger Agreement in accordance with its terms.
Litigation ensued for over two years and all the way up to the Supreme Court of the State of Israel as Taro attempted to enjoin Sun Pharma from acquiring a controlling stake of Taro through a tender offer without adhering to the "special tender offer" rules under Israeli law that provide protections for minority shareholders. Around the same time, in June 2008, Sun Pharma attempted to exercise an option to acquire a large block of shares from certain members of the families of the Company's founders and ultimately entered into a letter agreement and settlement agreement in September 2010 with these controlling family shareholders pursuant to which Sun Pharma acquired one-third of the voting power of Taro's capital stock. By the end of September 2010, Sun Pharma had acquired control of the Taro Board and majority control of the Company's voting power. We fear that Sun Pharma is now trying to use its leverage to squeeze out the minority shareholders at a price that deprives them of the full value of their investment.
To ensure fair price in a transaction that maximizes value for minority shareholders, the Board must engage independent financial and legal advisors to help the Company either negotiate a fair price with Sun Pharma for the sale of Taro's minority publicly traded shares or conduct a robust and unbiased auction allowing the Company to identify a buyer willing to pay a fair price for Taro's public shares. Minority shareholders have rights accorded to them that must be protected and Sun Pharma should not be allowed to unilaterally impose the Acquisition Proposal on the minority shareholders of Taro without the advice of independent advisors and the approval of a disinterested body of directors.
For all these reasons, we believe the Acquisition Proposal woefully shortchanges Taro shareholders. Unless and until the Board commits itself to a course of action that is consistent with its fiduciary duties, we remain vehemently opposed to the Acquisition Proposal and will vigorously campaign against it. We are currently evaluating all legal options and reserve our rights to take any action necessary to ensure that the Company is run in a manner that is consistent with the best interests of the non-Sun Pharma shareholders. Rest assured we will do all that we can to ensure that shareholders receive the maximum value for their investment in the Company.
William C. Martin
Chairman and Chief Investment Officer
William C. Martin
Raging Capital Management, LLC
SOURCE Raging Capital Management, LLC