Taro Pharma: Going private

Well this didn’t take that long. My investment in Taro Pharma was based on the stand-alone company is worth a lot more than the market price if $19/share. Today Sun Pharma made an offer to take the company private at $24.50. The stand-alone company was likely to be worth multiples of the offer price in 3-5 yrs. Although this is a nice 25% pop in little over a month.

I don’t believe the story with Taro Pharma is over yet. If you look at what happened with Caraco, you will see Sun Pharma having to raise its offer price. There should be an independent valuation happening next. I think the independent valuation comes in at a higher price. Although the process could take a few months, it is likely worth the wait.

When Sun Pharma offered to buy out Caraco, Caraco’s BOD hired William Blair to do a fair valuation. The results of the study are public knowledge. So we can look at that to get an understanding of what multiples Taro should get.

Taro did $35M of EBIDTA in Q2 2011. It did around $29M of EBIDTA in Q3 2010. So if we take $32M as the mid-point, you are looking at around $128M. Putting at 11x EBIDTA multiple gets you a valuation of $1.4B. The company had $150M in cash and $50M of debt at Q2 2011. So on EV/EBIDTA you are looking at valuation of $1.5B. Taro has 44.5M shares outstanding. So a fair value of $33.7 per share.  If we look at some recent M&A transactions, the EV/EBIDTA multiple has been around 15x. At that multiple you are looking at a valuation of $45 per share.

In any case, the likely final price for Taro Pharma will be higher than the current offer price. It is worth waiting a few months for the fair valuation process to go through.

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