Taro Pharmaceutical Shareholder, Guardian Point Capital, Issues Letter to Sun Pharmaceutical

Jul 17, 2012, 09:00 ET from Guardian Point Capital

CHARLOTTESVILLE, Va., July 17, 2012 /PRNewswire/ -- Guardian Point Capital, a minority shareholder of Taro Pharmaceutical Industries Ltd. (TARO), announced today that it delivered the following letter to Sun Pharmaceutical Industries Ltd. (SUNPHARMA.BO) in response to the proposal made by Sun Pharmaceutical Industries Ltd. on October 18, 2011 to acquire the remaining outstanding shares of Taro for $24.50 per share.

July 17, 2012

Mr. Dilip Shanghvi
Sun Pharmaceutical Industries Ltd.
Acme Plaza Andheri Kurla Road
Mumbai, Maharashtra 400059
India

Dear Mr. Dilip Shanghvi,

I manage an investment partnership that focuses on buying great businesses, at great prices, run by best-in-class management teams. Given the nature of competitive markets, it is typically difficult to identify opportunities that satisfy all three criteria without some "hair."  Our initial purchase of Taro Pharmaceutical Industries Ltd. ("Taro" or the "Company") in 2010 reflected that - namely an over-the-counter listing and unaudited financials. The bet was a reflection not only on the company's potential to rebound from gross mismanagement under Barrie Levitt, but more importantly the opportunity to ride on the coattails of a CEO with a 17-year, 38% compounded track record of shareholder value creation. 

Since our investment, after talking the talk in your three year battle for control of Sun, you have walked the walk. The original "hair" is now gone, with audited financials and a NYSE listing, and Taro has gone from hidden value to value in plain sight. Most importantly, you have significantly improved the fundamentals of the company with meaningful top and bottom line growth and operating margins that have more than doubled under your stewardship.  Because of these improvements we believe that the company is cheaper now than when we first purchased it, despite the significant share price appreciation.

The only questionable action since your involvement is the still lurking nine-month old $24.50 bid that you made for the rest of the company. As a former investment banker, I know that it should take less than nine hours, not nine months, to run the standard fair valuation templates. While previous letters from minority shareholders have done a good job of highlighting the inadequacy of the offer, I offer up the William Blair Caraco buyout opinion metrics as a common sense analogy given the similarities between the two situations (notwithstanding the fact that Caraco was unprofitable compared to Taro's $200mm in LTM net income).

The Caraco valuation template points to a fair value in the range of $75 to $100 per share using the two metrics (LTM EV/Revenue and LTM EV/ EBITDA) you focused on in that recent minority shareholder buyout. Citigroup will offer up many more fundamental metrics but they will all point in the same direction – a fair value materially higher than your original offer. 

Warren Buffett likes to say, "It takes 20 years to build a reputation and five minutes to ruin one." Ultimately, while we are comforted by the fact that the merger transaction cannot be consummated without the affirmative recommendation of the Special Committee and the approval of the majority of the minority shares, when we invested in Taro we did not expect to need to rely on U.S. and Israeli laws to protect our investment. Instead, we believed that you would behave in a manner consistent with your past: shrewd, but not sinister, and in a self-interested way that preserves both your hard fought reputation for fairness and the Sun Pharmaceuticals brand as the preferred partner of choice. 

In your 2009 FSB Convocation speech to graduating students you said,

"The world needs a renewed entrepreneurial spirit which does not gamble away decades of accumulated shareholders' wealth for short term greed and glory. There is a need for young leaders like you to lead in this change while creating new paradigms of leadership. Globally accepted – made in India. In this, you will make all of us proud."

We look forward to the removal of the uncertainty created by this bid, your continued "signal" to the market that you are the antithesis of the entrenched and unethical controlling shareholder ethos once espoused by Barrie Levitt, and many more years of "made in India" shareholder wealth creation.

Yours Sincerely,

/s/ Tim Davis
Tim Davis
Managing Partner
Guardian Point Capital

SOURCE Guardian Point Capital