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Daiichi Loses 20% on Selling Its Stake in Sun Pharma; Larger Questions on Market Liquidity Too

Sun Pharma has fallen 10% to 940 as Daiichi prepares to sell its stake of 214 million shares, on the stock exchanges. Daiichi acquired Ranbaxy at the price of Rs. 737 per share in 2008, and recently, Ranbaxy was merged into Sun Pharma for a ratio of 8 Sun pharma shares to 10 Ranbaxy shares.

This transaction may not involve the exit of Daiichi completely, as they might retain some stake, and they have continuing business with Ranbaxy. But it ends their nearly-seven-year ordeal with the Ranbaxy stock during which the company was subject to many FDA reviews, humiliating and financially hurting import bans from its Indian plants and a solidly profitable company moving to a loss making one.

Currency Hit: Daiichi Still Lost 20%

They paid around Rs. 20,000 cr. to acquire Ranbaxy.

At the time of their acquisition, the Yen was 2.5 to a rupee. The purchase in Yen terms was 500 billion yen.

Today, supposedly, they sold the stock at 20,420 cr. a 1.9 yen to a rupee. Which makes the sale worth 400 billion yen.

7 years, and a 20% loss on a transaction that broke even in rupee terms, because the Yen appreciated with respect to the rupee. The rupee went through a massive depreciation in 2013 and has fallen from the 45 levels (to the USD) in 2008 to 63 today.

(Don’t tell me they hedged. Hedges cost 5-6% a year, which would have lost 40% in seven years for the hedge itself!)

FII Data Will Be Wonky

20,000 cr. in a single day is a massive amount. To give you an idea, the entire NSE stock exchange traded just Rs. 17,000 cr. yesterday!  And here’s today’s data, till now:

image The shares will have been purchased by Foreign Investors. Their data will look strange, as they will effectively have purchased stock in huge amounts and Daiichi would have exited (as a foreign investor). So today’s FII data will look weird.

What about Liquidity?

When you take 20,000 cr. away from the market – Daiichi is taking the money out, but investors who buy the stock will have allocated a lot of money into this stock while leaves very little money for anything else.

Does this money, that’s being sucked out of the market (and taken to Japan) cause a temporary stutter in the market? Think about it, the same buyers that bought from Daiichi are the ones buying other stocks – they would have very little left to allocate for the future, I imagine. So tomorrow, if there’s more sellers, are there enough buyers at that price, or will the market fall in order to reflect the lower demand?

  • 1. You need to add $500M to the losses which was paid by Daiichi to USFDA as settlement fees.
    Some guesses:
    2. Since it is block deal, funds were pre-arranged. Rumor goes that Dilip Shanghvi raised his stake.
    3. It is likely that price band for this block deal (930-960) was negotiated when Sun Pharma got into this deal. Else Daiichi would not have agreed for stock swap.
    4. Sun Pharma F&O activity suggests price band is highly controlled and breakaway/ breakdown from today’s price will be fought fiercely this month.

    • Very good points!
      Daiichi losses are just scary 🙂
      Yes DS is likely to have pushed stake up. He has the money but is probably limited by the 4 to 5% a promoter can increase.
      I don’t think Daiichi had that much of a choice, given where Ranbaxy was going. Plus, all Ranbaxy top mgmt have been told they will hve to find positions elsewhere, I think, so the deal was really a strong takeover.

  • kumar says:

    good thing that there is no MAT on this sale. After April 1, 2015, so no MAT.
    Economic times has some speculation of this deal, without naming any names, but attributes a tax angle to the sale. Not sure how far that is true.
    Another article in the same paper says that an anonymous source is believed to have said that the government will not succumb to any pressure on the MAT tax bill, and moreover, will start asking for more money for the previous years. 🙂
    If all FIIs take their money and go home, who will be left to play the game?
    Perhaps there are other ways to trade the indian market, than to come and invest in india [given that it is easy to come in, but relly really hard to take your moeny out and go].

    • Why no MAT? I thought that was only for FIIs, and Daiichi is not an FII?

      • kumar says:

        My assumption was that they were a japanese corporation. Not sure how they are structured for this specific deal.
        Their status is irrelevant anyway, since this deal took place after April 2015, and they will not come under MAT. The economic times article seemed to imply that MAT tax was the main reason for this sale, which does not make sense to me.
        If the tax does not kick in until the sale happens, triggering a sale for avoiding the tax seems a silly reason to me.
        This is the least of the problems in this sector [pharma] anyway. Just ask how much testing was done to make sure that generic drugs actually work?

  • kumar says:

    now, all i ask for is a few defaults on bonds that come due in the next one two months.
    Then, the market becomes very interesting.

  • gb says:

    Regarding So tomorrow, if there’s more sellers, are there enough buyers at that price, or will the market fall in order to reflect the lower demand?
    I usually trade market based on technical and this is classical case of island reversal pattern …whenever price gonna revert(no doubt may take time but that 11% upside is on the table) ..psychologically if and when it happen people fear missing out and keep pushing it to higher level….(until it reaches 1040)
    if u remember infy 2200/2900

  • gb says:

    Regarding liquidity in general i still feel lot of money are just sitting idle u keep giving them 10% cut they gonna pick it up until Greece default on its debt(risk on risk off move) /us starts hiking rate ( Reallocation b/w assets on capital market line) which also seems postponed)….until then people are ready to bat on every pitch …( i hope Mr Yograj singh wont this take this personally) ..

  • Naresh Nayak says:

    Deepak I just read this article. Maybe the parent hedged the yen dollar pair equivalent to the Indian rupee exposure. They would have made their gains there in case such a transaction occurred. Check the Japanese balance sheet and you might get an answer.

  • NAresh says:

    Hi Deepak,
    True, but I wouldn’t hedge the Rupee Yen cross as it is too expensive for a Japanese company reporting in JPY to hedge at 6%. An Indian company borrowing JPY could find it of value. As a Japanese company I would have atleast hedged the USDJPY pair covering for atleast part of that investment. If I hedged at 80 JPY to the USD, I would have exited the hedge at 120 JPY to the USD which is a 50% gain. If they didn’t hedge at all and invested in an emerging market, they don’t understand currency and should not have made this investment of such magnitude at all. Daiichi should have stayed on as an investor to create marketing alliances and synergies with Sun Pharma which is a very vastly superior company and will be in the top 3 generic companies in the not too distant future. I still don’t know what will Daiichi do with that amount of capital it has exited from India. Holding it in JPY is a bit too high risk at the moment.

    • Actually for pure accounting purposes, Daiichi wrote all of this off way back in 2009, so technically they will be profitable now (having taken the losses). The USDJPY hedge makes no sense for the Indian rupee investment, plus they weren’t supposed to exit, it was supposed to become India’s arm of Daiichi, remember? The Sunpharma thing was a distress-ish exit, negotiated way before the actual merger date. Typical hedges are cash flow based, and very few, and extremely rare ones will be on the investment heads, and if so will never be on the USDJPY, it will be on JPYINR.
      Daiichi competes directly with Sunpharma. Can’t have your cash locked into a competitor 🙂 With 9% they don’t get any control, and you can get an annual report even with 1 share. Might as well move it elsewhere.