Strides Arcolab (Strides) has concluded sale of its Agila specialties division
(transacted on 28 February 2013) to Mylan for a total consideration of US $1.75bn.
The board of Strides has approved a special dividend of Rs500/share, resulting in
total distribution of $526m pre-tax and of $477m post-tax payout to shareholders.
The transaction is closed at INR/USD of 62 and the distributed amount is 88% of
the free cash available (first tranche) to Strides.
Key highlights
™ According to the revised terms, Strides will receive $1.75bn consideration from
Mylan. It has already received $1.5bn; the remaining $250m “hold back” will
be received upon successful closure of the Bangalore facility warning letter.
™ After provisioning for various expenses, repaying bulk of the outstanding debt
and retaining $75m of growth capital, Strides has announced distribution of
$525m (Rs500/share) in the form of dividend to shareholders. The record date
for the same will be 20 December 2013.
™ Strides remains optimistic of resolving the FDA issues on the Bangalore
facility, and receiving the “hold back” ($250m) and regulatory escrow ($40m)
by H2CY14. Post the $50m tax payment liability, Strides will have another
$240m to potentially distribute to shareholders if the FDA issues are resolved.
™ Combined with the $525m dividend payout, the shareholder distribution will
be in line with Strides’ initial guidance of $700m-800m pre-tax distribution.
™ We estimate the pharma business to generate EPS of ~Rs30/share in CY14.
Additionally, Strides has put another $100m in a tax escrow account, which
can be received after 4 years. Assuming 85% distribution from hold back
receipts, 12x CY14E EPS for pharma business and NPV of the $100m tax
escrow, our fair value for Strides (ex-dividend) works out to Rs612/share.
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(transacted on 28 February 2013) to Mylan for a total consideration of US $1.75bn.
The board of Strides has approved a special dividend of Rs500/share, resulting in
total distribution of $526m pre-tax and of $477m post-tax payout to shareholders.
The transaction is closed at INR/USD of 62 and the distributed amount is 88% of
the free cash available (first tranche) to Strides.
Key highlights
™ According to the revised terms, Strides will receive $1.75bn consideration from
Mylan. It has already received $1.5bn; the remaining $250m “hold back” will
be received upon successful closure of the Bangalore facility warning letter.
™ After provisioning for various expenses, repaying bulk of the outstanding debt
and retaining $75m of growth capital, Strides has announced distribution of
$525m (Rs500/share) in the form of dividend to shareholders. The record date
for the same will be 20 December 2013.
™ Strides remains optimistic of resolving the FDA issues on the Bangalore
facility, and receiving the “hold back” ($250m) and regulatory escrow ($40m)
by H2CY14. Post the $50m tax payment liability, Strides will have another
$240m to potentially distribute to shareholders if the FDA issues are resolved.
™ Combined with the $525m dividend payout, the shareholder distribution will
be in line with Strides’ initial guidance of $700m-800m pre-tax distribution.
™ We estimate the pharma business to generate EPS of ~Rs30/share in CY14.
Additionally, Strides has put another $100m in a tax escrow account, which
can be received after 4 years. Assuming 85% distribution from hold back
receipts, 12x CY14E EPS for pharma business and NPV of the $100m tax
escrow, our fair value for Strides (ex-dividend) works out to Rs612/share.
™ Post issuance of the FDA warning letter to Strides’ Bangalore facility, there has been a few modifications in
the terms of the original agreement.
o According to the original terms of the agreement, Strides was to receive $1.6bn upon closure of the
transaction and up to $250m upon delivery of certain milestones. Strides had expected to spend
$125m towards meeting these milestones
o According to the revised terms, Strides has received $1.6bn along with $150m of incentives.
o However, given the issuance of the warning letter, Strides has put $100m in an escrow account with
Mylan. The amount would be utilized towards the remediation measures to resolve the FDA issues.
o Also, Strides will invest ~$50m into buying back certain product rights from its B2B partners and
transfer them to Agila. It will help mitigate the damages incurred due to delayed product approvals,
etc post the warning letter issuance.
™ Strides has had to incur an additional expense of ~$150m, but the management indicated that the shortfall
was largely made up through savings (vs initial estimates) across various heads – primarily employee and
minority interest payouts.
™ In addition, there is a lowering of tax liability from $280m (as envisaged earlier) to $230m. While $180m of
this liability will be paid immediately, the remaining $50m will be post receipt of the holdback.
™ Strides will pay off most of the outstanding loans/ quasi loans (~$285m) and retain only ~$50m of low cost
long-term debt on books. It will also retain $75m (below the earlier guidance of $100m) as growth capital in
the pharma business.
™ Strides remains optimistic of resolving the FDA issues and receiving the “hold back” ($250m) and regulatory
escrow ($40m) by H2CY14. Post the $50m tax payment liability, Strides will have a further $240m to
potentially distribute to shareholders if the FDA issues are resolved as planned.
™ Strides has indicated that it is not pursuing aggressive inorganic growth at this point of time and does not
envisage any material capex investments (beyond $75m) for the growth of pharma business. This increases
the odds of shareholders receiving a substantial portion of the $240m cash flow.
™ Combined with the $525m dividend payout declared yesterday, the overall distribution will be in line with
Strides’ initial guidance of $700m-800m pre-tax distribution to shareholders and would account for >85%
distribution of the free cash generation from the transaction. In our view, this would probably be among the
highest payouts arising from business divestments and is in contrast to the strategy of companies like
Piramal Healthcare, etc which opted to retain a large chunk of the cash inflows to create new businesses.
™ The management has cited that Strides will not be eligible for any interest on escrow amount; however, it
remains optimistic of receiving the said receipts in due course of time.
‰ Pharma business – interesting growth prospects
™ The retained pharmaceutical business (ex-injectables) reported Rs1.41bn of EBITDA (post the Rs210m forex
loss) and Rs7.1bn revenues for 9MCY13. Given that the company has not received any of the anticipated
ANDA approvals during the year, this performance is fairly credible. Strides have filed 46 ANDAs in the US
market with 18 awaiting approval, which provides strong visibility.
™ Strides also got FDA approval for its semi-solids facility and ointments facility in Italy. It expects the first
approval from this facility in CY14.
™ We see interesting medium-term growth outlook for this business given Strides’ presence in multiple high
growth business segments including US generics (niche business focussed on soft gelatins), Africa branded
formulations, EU generics and Institutional Malaria business.
™ We estimate that this business can generate an EPS of ~Rs30/share in CY14.
™ Strides will provide more details on the outlook of this business post Q4CY13 results.
Valuations & View
Adjusted for the Rs500/share dividend payout and assuming timely receipt of the remaining $250m proceeds, we see
significant upside for Strides from the current levels. While currently small, we see interesting growth possibilities in
Strides’ Pharma business and potential for significant value creation in the medium term. Reiterate Outperformer
with a price target of Rs612 (adjusted for Rs500/share dividend payout). Delays in resolution of the warning letter or
escalation of the compliance issues and inability to receive the remaining $250m proceeds are key risks to our call.
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