Taro Pharmaceutical Industries Ltd. (NYSE:TARO) announced in November a further delay on a vote by minority holders of the sale of the remaining minority interest to Sun Pharmaceutical Industries (SUNP - NSE).  The minority holders have held out for a higher price than Sun Pharma has offered.  Sun Pharma already owns 66% of Taro’s shares and controls 77.5% of voting rights.  Taro contributes about a third of Sun Pharma’s earnings.

Bid Rejection

On August 12, 2012, Sun Pharma issued an official offer of $39.50 per share to acquire the outstanding minority shares of Taro.  At the time of the offer, this was 7.2x TTM EBITDA.  The new offer was a 60% premium to the previous one of $24.50.  Taro’s board accepted that bid for the remaining 34% at that price, but minority shareholders have not.  Hours following the increased August bid, Grand Slam Asset Management issued an open letter asking shareholders to reject the new offer.  Grand Slam noted in their release that similar transactions in the market place were at 15x TTM EBITDA and demanded a minimum of $48.50 per share.

Within 2012, Bristol-Myers Squibb Co. (NYSE:BMY)/AstraZeneca plc (NYSE:AZN) and GlaxoSmithKline plc (NYSE:GSK) made offers around 15x TTM EBITDA for their individual takeovers.  Bristol-Myers Squibb and AstraZeneca together bought Amylin for $7 billion which was well over 15x EBITDA.  GlaxoSmithKline bought Human Genome Sciences for $ 3.6 billion which was also over 15x EBITDA.  Bristol-Myers Squibb and GlaxoSmithKline are much bigger acquirers than Sun Pharma; however, Taro still deserves the market price.

Following the August bid by Sun Pharma, the share price increased to slightly over $40.  The Street’s confidence grew that a deal would happen at a price above the $39.50 offer.  The shares value increased steadily to slightly over $45 then the next event occurred in the story.

2Q Earnings

Taro reported fiscal 2Q earnings with PAT up 12.2% y/y on a sales increase of 16.4% y/y behind price increases as well as volume growth in the US market.  Price increases go through, looks like a pretty solid quarter with nothing too odd in the numbers.

IsZo Capital Management, a large minority shareholder in Taro, thought something did not look right in the numbers and issued a statement to the Board of Taro. It stated management may have under-reported net sales by inflating reserves for product returns, charge backs, rebates and other items ahead of the upcoming shareholder meeting to approve the sale to Sun Pharma. Based on a comparison to IMS data, IsZo Capital believes $15.4 million in sales were not reported.   Sequentially sales increased by 1% at Taro versus 11% with IMS, significantly different than in recent quarters.  The data does give IsZo Capital reason to have the results verified. Under reporting of revenue and reduced outlook as a result, would lower the valuation of Taro and likely result in a lower share price for the minority holders if Sun Pharma closed the transaction.