Taro Pharmaceutical Board Relies on Flawed Analysis to Shortchange Minority Shareholders

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Apr 23, 2024, 07:00 ET

NEW YORK, April 23, 2024 /PRNewswire/ -- Taro Pharmaceutical Industries Ltd. is relying on an investment bank's flawed analysis to justify its sale to Sun Pharmaceutical Industries Ltd., according to Krensavage Asset Management LLC, Taro's largest minority shareholder¹.

Sun's $43-a-share-bid for the 21.5% of Taro it doesn't already own undervalues Taro by roughly 44% to Taro's fair value of at least $77 a share, according to Krensavage².

Taro's leaders own no shares of the company, dissuading them from fulfilling their fiduciary responsibility to minority shareholders.

The law requires Sun to obtain approval of the majority of Taro's minority shareholders. Taro has scheduled a vote on May 22.

Sun attempts to justify its paltry offer with a January 17 fairness opinion from an investment bank that applies below-market multiples to suspect financial projections³. Taro is paying the bank $4 million for its opinion.

Flaws in the investment bank's analysis include its use of a cost of capital of 10% to 12%. Bloomberg suggests 7.9%. The difference reduces the value of Taro by roughly $6 a share⁴.

The bank's analysis relies on estimates—provided by Taro management—of free-cash flow during the next ten years of $445 million. Over the last ten years, Taro has generated $2 billion of free-cash flow.

The last time Sun sought the remainder of Taro—in a bid that failed in 2013—Taro's advisors relied on management forecasts that understated the company's actual net income by $1.2 billion⁵.

The most-glaring flaw in the investment bank's analysis is its decision to discount Taro's EBITDA by 45% to its peers, citing a historical multiple depressed by Sun's majority ownership. The investment bank wants to discount the value a dollar produced by Taro to 55 cents because of an impairment that will disappear. A dollar is worth a dollar.

If the bank uses the median multiple, it would arrive at a value of $55 a share.

However, the use of EBITDA is flawed because it reflects inflated costs. Sun is likely to trim Taro's expenses by eliminating public-reporting requirements and consolidating operations.

The best metric is a multiple of gross profit because it assumes cost cuts. Peers trade at a median gross profit multiple of five times, suggesting a value for Taro, excluding a takeover premium, of $77. Sun's $43 bid values Taro at one times gross profit.

Krensavage urges Taro shareholders to consider the fair value of their shares. Please see our other two public letters for additional analysis.

Krensavage Asset Management Opposes Sun's Lowball Bid for Taro

Krensavage Asset Management Remains Opposed to Sun's Predatory Bid for Taro

Regards,
Michael P. Krensavage
Managing member
Krensavage Asset Management LLC

Notes:
¹Krensavage Asset Management's 646,453 shares of Taro on December 31 make it Taro's No. 2 shareholder, according to Bloomberg.
²Taro had 37,584,891 weighted-average shares outstanding in the quarter ended December 31. Sun controlled 29,497,813 shares of Taro according to Sun's January 17 13D/A.
³Presentation to special committee dated January 17, 2024:
https://www.sec.gov/Archives/edgar/data/906338/000119312524037103/d762369dex99c6.htm
⁴At the midpoint. A Krensavage estimate referencing slide 7 of the presentation to special committee dated January 17, 2024.
⁵Presentation to special committee dated August 12, 2012:
https://www.sec.gov/Archives/edgar/data/906338/000094787112000742/ss157108_ex99c2.htm