Avail Piramal Healthcare's Buyback Offer | Value Research The buyback offers existing investors a good exit opportunity
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Avail Piramal Healthcare's Buyback Offer

The buyback offers existing investors a good exit opportunity

Recently, Piramal Healthcare announced the buyback of 20 per cent of its total outstanding shares through a tender offer. The buyback will cost the company Rs 2,508.16 crore. Its shareholders have approved the buyback through a postal ballot. Altogether 4,18,02,629 shares will be bought back (20 per cent of total outstanding shares, which was 20.9 crore on September 30, 2010). The company has announced an offer price of Rs 600 per share. The buyback will be financed out of the company’s free reserves. The buyback opens on January 17, 2011 and closes on February 7, 2011.

Why the buyback?
In its public announcement the company said that subsequent to the sale of business and receipt of first tranche of consideration from Abbott Healthcare Private Ltd. and the sale of Piramal Diagnostic Services Private Limited (PDSPL) to Super Religare Laboratories, the board considered various alternatives for rewarding shareholders. Since these two sales increased the company’s accumulated free reserves, the board decided to distribute about Rs 2,500 crore among shareholders. After considering several alternatives, it decided to recommend buyback of shares as this is a more tax-efficient way of rewarding shareholders compared to other alternatives, including interim dividend. Further, the company indicated that the buyback will help improve its return on equity (RoE) by reducing the equity base. Piramal Healthcare sold its healthcare solution business for US$ 3.8 billion (Rs 17,140 crore) in May 2010. It sold its shareholding in its subsidiary PDSPL for Rs 600 crore.

Financial health
Good growth: The company has registered a five-year compounded annual growth rate (CAGR) of around 17 per cent in total income and 21 per cent in profit after tax. Increase in reserves. Between March 31, 2010 and September 30, 2010, its reserves and surplus swelled 866.2 per cent and stood at Rs 14,095.72 crore.

Falling debt: The company’s total debt declined 32.3 per cent in FY10 compared to FY09.

Disappointing Q2: Piramal’s sales in Q2FY11 declined 23.6 per cent year-on-year (y-o-y). The management says that concentration of focus on completing the transaction with Abbott and Super Religare Labs led to a lack of focus on the core business. Revenue from the domestic formulation business declined 22 per cent y-o-y and from the contract research and manufacturing services (CRAMS) division declined 28 per cent y-o-y. However, due to its divestitures, it registered an exceptional growth in profit after tax of 10,905.06 per cent y-o-y.

Earnings per share: On a trailing four-quarter basis (December 2009-September 2010), the company has posted an earnings per share (EPS) of Rs 616.83, which includes the money received from divestitures (an exceptional item). If we exclude this exceptional item and take tax as Rs 34.04 crore (of FY10), the adjusted EPS (excluding exceptional item) of the company comes down to Rs 14.68.

1-year stock price: Over the last one year the stock has traded in the range of Rs 335.65- 575.90.

Traded volumes: During a one-year period (from December 14, 2009 to December 10, 2010), the median trading volume of the stock was 1,12,220 (0.01 crore), the maximum traded volume being 1.24 crore and the minimum being 7,900.

Impact on stock price
The buyback was announced on December 9, 2010. The stock surged 2.2 per cent between December 9 and December 16, 2010. It touched a high of Rs 471 on the day of the announcement, but is currently trading at Rs 464.80 (December 16, 2010).

Mode of buyback
In the buyback shares will be accepted proportionately, based on the number of shares tendered by all the shareholders since only a limited amount of shares are to be bought back (20 per cent). If the number of shares tendered is more than the number of shares to be bought back, the company will buy back shares from each investor according to the following formula: (No. of shares tendered by a shareholder/ Total number of shares tendered) X Total number of shares to be bought back.

The company’s promoters have the option to participate in the buyback. They are eligible to tender around 10.1 crore shares. According to a report by Parag Parikh Financial Advisory Services, “The acceptance of shares will be done proportionately so that post buyback the promoter holding may not fall below the current percentage held (53.2 per cent). The offer document says that no single entity can tender more than 4.18 crore shares. Since all the promoter entities hold less than 4.18 crore shares each, the possibility that promoters will tender all their shares for the buyback is very high.” Thus, promoters are expected to participate strongly in the buyback.

Post-buyback scenario
The company has received $2.2 billion as upfront payment from Abbott and Rs 300 crore as upfront payment from PDSPL. After paying taxes amounting to about Rs 3,600-3,700 crore and spending around Rs 2,500 crore (on the buyback), Piramal Healthcare will be left with about Rs 3,500 crore of cash in March 2011. Post-buyback the company’s cash per share (on a reduced equity base of 16.72 crore shares) will come to Rs 209. As mentioned earlier, the adjusted EPS (excluding exceptional items) pre-buyback stood at Rs 14.68. Post-buyback the company will have an adjusted EPS (excluding exceptional items) of Rs 18.35 (see table below) on a lower equity base.

Concerns
The company will get the balance $1.6 billion from Abbott over the next four years in four instalments. It will get the balance Rs 300 crore for PDSPL over the next 12 to 18 months. How the company plans to deploy its considerable cash hoard remains unanswered. The management has indicated that it is examining various options and will take about six months to decide. Besides hunting for new opportunities, the company is also expected to deploy some money into its existing business.

As mentioned earlier, the company has sold its domestic formulation business to Abbott. According to a report by Equitymaster Agora Research, “The domestic formulations business, which accounted for 50 per cent of the company’s total sales, will no longer form a part of Piramal’s business. As a result, net profit is expected to decline considerably in FY11 and FY12.”

What should investors do?
The buyback offer creates an interesting opportunity for shareholders. The buyback price of Rs 600 per share represents a premium of 19 per cent over the company’s average share price over the three months preceding the date of the board meeting. Investors may take advantage of the buyback offer and tender their shares.



Post-buyback scenario
Total number of outstanding shares (cr) 20.9
Number of shares for the buyback (cr) 4.18
Total cash outflow (Rs cr) 2,508
Number of shares post buy back (cr) 16.72
Cash left post buy back (Rs cr) 3,500
Cash per share post buy back (Rs) 209
Adj. EPS (excluding exceptional items) (Rs) pre-buyback 14.68
Adj. EPS (excluding exceptional Items) post buy back (Rs) 18.35




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