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Disclosure: I am long TARO
The Southern Peru case was involving a controlling shareholder buy-out. The judgement was $2 billion in damages to minority shareholders and >$300m in attorney fees. It primarily established the following:
At the end of the day, the Supreme Court in Southern Peru unabashedly acknowledged that such genuine practical concerns might be raised by a burden shift that cannot be known before trial, but the Court clarified in such cases going forward that the burden of persuasion would remain “with the defendants throughout the trial to show the entire fairness of the interested transaction.” In this regard, the Supreme Court’s ruling is likely in keeping with the advice of counsel to controlling stockholders in such cases already, i.e., establish a special committee process that is unassailable but prepare for trial as if the burden of proof remains on the defendants. For transaction planners and litigation counsel alike, Southern Peru appropriately reinforces the practical reality that defendants in these cases need to protect the transaction with good process irrespective of whether they get the burden shift before, at or after trial.
Let's look at the parallels from this case:
1. In the Southern Peru case, the special committee was not given free hand to explore ALL strategic alternatives. The Taro's 10/05 filing states:
that Sun Pharma’s majority ownership of Taro and its expressed unwillingness to consider selling any of its Taro shares or entering into alternative transactions effectively discouraged third parties from making offers that were competitive with that of Sun Pharma and its affiliates;"
2. In the Southern Peru case, there had been huge disagreements(we are talking 300-400%) in arriving at the FAIR value between the minority shareholders and the Special committee.
Just like in the Southern Peru case, there are different valuation approaches used by special committee and minority shareholders: the DCF Approach, Relative Valuation methodology(Multiples of Actuals LTM EBIDTA). In the Southern Peru case the Relative valuation methodology was favored by the defendants(Controlling shareholder) and the minority shareholders favored the DCF approach. Ultimately, the court looked at all valuation methodologies to determine fairness.
The record reflects that the Court of Chancery applied a “disciplined balancing test,” taking into account all relevant factors. The Court of Chancery considered the issues of fair dealing and fair price in a comprehensive and complete manner. The Court of Chancery found the process by which the Merger was negotiated and approved constituted unfair dealing and that resulted in the payment of an unfair price
- In the TARO's case the company has used DCF approach with inputs/estimates which the company itself has claimed are unreliable (see Oct 5th filing) when instead they could have used LTM based Relative Valuation methodology with readily available market data(LTM Multiples of comparable peers like Actavis and Medicis).
- In fact, if the Actuals of the first 9 months of 2012 are compared with these estimates, the difference is remarkable highlighting its inaccuracy.
- In the past 3 years TARO has grown it's sales by ~15% and EBIDTA by an impressive ~50%. However the 2013-2017 future estimates forecast a negative 6.7% growth.
- Moreover, the multi-billionaire SUN founder Mr. Shanghvi himself, rightfully pooh-poohed the 5 year estimates in the 11/10 SUN pharma conf call. When asked about the 5 year sales forecast/outlook for SUN and TARO, Mr. Shanghvi said "We are looking for an astrologer here! We can only see 1 year"
- The estimates were provided by TARO management whose employment prospects are directly dependent on TARO's board which is full of SUN members.
- The average transactions for generic companies as reported by Bloomberg was 14 times LTM EBIDTA which would result in share price >$120 per share. The Actavis transaction was done at 14.8 times LTM EBIDTA.
- Also, it has been argued by a shareholder that Citi cannot be considered independent as it has various ongoing relationships with SUN as well as it stands to gain fees ONLY upon consummation of TARO buyout .
- Many shareholders believe, TARO NYSE share price is NOT indicative of the fair market value of TARO for various reasons including that for most of its trading in NYSE there has always been a threat of majority buy-out offer. For example, b/w Oct 2011-June 2012 the evaluation of $24.5 offer effectively served to cap the share price from reaching it's true fair value. TARO also has never conducted an earnings conference call nor has gone to a single investor conference in last years. TARO is not covered by a single analyst.
The detailed judgement can be seen here: