Thursday, May 27, 2010

>Abbott, US has bought the domestic formulation business of Piramal Healthcare

Most profitable business sold out…
Abbott, US has bought the domestic formulation business of Piramal Healthcare (PHIL) for cash consideration of US$3.7 billion (US$2.12 billion upfront and equal annuity payment of US$400 million for four years starting CY11). The deal is valued at ~9.3x the revenue of the domestic
business and is expected to close by Q2FY11 end. The domestic formulation business contributed ~54% to the FY10 topline. The deal includes transfer of manufacturing facilities at Baddi, rights to ~350 brands and trademarks and transfer of ~5,200 employees of the domestic
formulations business to Abbott. PHIL has received Rs 350 crore as nonabatement
fees whereby the Piramal group companies will not enter the branded domestic business for the next eight years. We estimate the residual businesses will clock an EPS of ~Rs 8.2 in FY12E. Valuing the cash per share at Rs 496 and residual business at Rs 98, we have arrived at a fair value of Rs 595 for PHIL, providing 18% upside from current levels. We are assigning BUY rating to the stock.

Highlights of Analyst Meet
PHIL has retained its CRAMS, global critical care, diagnostics and domestic API and vitamins/minerals business. The company is considering a special dividend post the deal. The proceeds from the deal will be used to retire debt of ~Rs 1300 crore and venture into other emerging opportunities. The company will also look at acquisitions to complement the residual business and enter newer businesses.

PHIL is set to receive US$3.3 billion on NPV value. This works out to Rs 496 per share (post long-term capital gains taxed at 21.5%, book value adjustment and debt repayment of ~Rs 1300 crore). The residual business is valued at Rs 98 (12x FY12E EPS). We rate PHIL as BUY with a target price of Rs 595. With cash utilisation by the management post the deal we expect
the stock to get re-rated, going forward.

To read the full report: PIRAMAL HEALTHCARE