IsZo Capital Calls upon Special Committee of Taro Pharmaceutical to Reject Immediately Nearly 7-Month Old, $24.5 per Share Sun Offer
NEW YORK, May 10, 2012 /PRNewswire/ --
IsZo Capital LP, one of the largest minority shareholders of Taro Pharmaceutical Industries Ltd. (NYSE: TARO), announced today that it delivered the following letter to the Special Committee of the Board of Directors of Taro demanding that it put an end to the uncertainty in the market holding back Taro's share price from achieving its full potential fostered by the Special Committee's continued delay in rejecting the proposal made by Sun Pharmaceutical Industries Ltd. (BSE: SUNPHARMA) on October 18, 2011 to acquire the remaining outstanding shares of Taro for $24.5 per share. Taro's closing share price on May 9, 2012 was $41.99.
May 10, 2012
Special Committee of the Board of Directors of
Taro Pharmaceutical Industries Ltd. Evaluating Sun Acquisition Proposal
Euro Park (Italy Building)
Yakum Business Park, Yakum 60972, Israel
Attention: Professor Dov Pekelman, Chairman of the Special Committee
Re: Harm to Taro Public Shareholders by Delaying Sun Offer Rejection;
IsZo Capital Letters dated November 29, 2011, December 13, 2011,
December 23, 2011 and February 15, 2012
Dear Members of the Special Committee:
Nearly 7 months have elapsed since Sun Pharmaceutical Industries Ltd. ("Sun") made its non-binding offer to acquire the minority shares of Taro Pharmaceutical Industries Ltd. ("Taro") for $24.50 per share. Even if such offer had any merit when first proposed, it would not be unreasonable to expect the Special Committee, aided by its financial advisor, Citigroup Global Markets Inc., to have made a determination concerning such offer months ago. The Special Committee's lack of action or response to the Sun offer, as detailed below, constituting a material breach of its fiduciary duties, has created market uncertainty that has a negative effect on Taro's share price. What befuddles the mind is that Sun's offer, since the onset, was and continues to be grossly inadequate, substantially undervaluing Taro on both an absolute basis and relative to Sun. Yet, the Special Committee continues to sit on the sidelines watching as the stock price of our company continues to outperform Sun's opportunistic offer by a wide margin.
Since the date of Sun's offer, Taro's shares have traded for 126 consecutive days above Sun's offer price. Since Taro's shares were re-listed for trading on the New York Stock Exchange on March 22, 2012, Taro's shares have traded anywhere from 56% to 97% above Sun's inadequate offer. Accordingly, the Special Committee cannot blame Taro's minority shareholders for wondering – what is the Special Committee waiting for to reject this offer? An increased offer price by Sun? Uday Baldota, Senior Vice President, Investor Relations, of Sun was cited as recently as March 15, 2012 by The Economic Times stating that Sun has no intention of increasing its offer price for Taro's shares.
What is most remarkable about the foregoing is the strong performance of Taro's share price, notwithstanding the harmful uncertainty the Special Committee continues to perpetrate in the market by its inability (or unwillingness?) to reject Sun's offer. Using the most recent closing price available for Taro's shares as of the date of this letter (May 9, 2012), why would a rational investor pay $41.99 per Taro share when the Special Committee is undecided about accepting an offer from its controlling shareholder that is lower by more than 70%? IsZo believes that the uncertainty in the market created by the Special Committee's failure to reject Sun's offer in a timely manner is holding back Taro's share price from achieving its full potential. If Taro's shares have substantially outperformed Sun's offer price under this kind of gratuitous uncertainty fostered by the Special Committee's inaction, it is not difficult to see that if the Special Committee decisively rejects what has been a grossly inadequate offer since inception and takes steps to engage with Taro's minority shareholders, the market would reward such actions to benefit of all Taro shareholders.
The time to reject Sun's grossly inadequate offer is now. Nearly 7 months have elapsed since Sun's opportunistic offer was made, Taro's share price has consistently and substantially outperformed Sun's offer, Sun has confirmed it does not intend to raise the offer price and the Special Committee's inaction is creating harmful uncertainty in the market depressing Taro's share price
IsZo Capital has written many previous letters to the Special Committee calling for the rejection of Sun's offer as opportunistic and unfair to Taro's minority shareholders. IsZo again asks the Special Committee to review those letters and also to consider the following additional compelling reasons to reject Sun's grossly inadequate offer:
1. In any acquisition or merger between Sun and Taro, the affirmative vote of shareholders representing a "majority of the minority" would be generally required to approve the transaction. Thus, to protect minority shareholders, it is essential that Taro have in place appropriate internal controls and procedures to ensure that votes are cast and tabulated correctly – i.e., that shares controlled by Sun and its affiliates are not tabulated as part of the minority vote, given Sun's status as Taro's controlling shareholder, regardless of whether the Taro shares controlled by Sun are held of record or in street name.
Unfortunately, Taro has proven it lacks adequate internal controls and procedures with respect to voting matters adverse to minority shareholders. Specifically, through communication between IsZo Capital's legal counsel and Taro's legal counsel, Taro has confirmed more than once that Taro has not made the efforts we believe would be adequate to verify the integrity of the "majority of the minority" vote required to approve certain management liability protection proposals adopted at Taro's 2011 Annual Meeting of Shareholders (the "Annual Meeting"). More specifically, Taro has confirmed to us that, notwithstanding the importance of such proposals to Taro's minority shareholders, Taro did not ask for or receive the information we believe is necessary to verify that only shares held by minority shareholders were counted in determining whether the "majority of the minority" voting standard was satisfied when such management proposals were approved at the Annual Meeting.
IsZo Capital, in exercising its rights as a Taro shareholder, has attempted several times to verify the accuracy of the Annual Meeting votes and requested in numerous occasions that Taro obtain the documentation we believe is necessary to confirm the integrity of such vote. However, Taro has rejected IsZo Capital's requests and has only shared limited information that does not address the specific concerns we have called to Taro's attention.
IsZo Capital did not vote in support of Taro's management proposals at the Annual Meeting and does not believe that other similarly positioned Taro minority shareholders supported such proposals or that Taro was able to obtain the "majority of the minority" shareholder vote required to duly approve the management liability protection proposals adopted at the Annual Meeting. Since Taro admittedly did not take steps we believe would have been necessary and appropriate to verify such vote, and rejected our request for related information, we have little confidence in Taro's ability to uphold the integrity of the "majority of the minority" voting standard in any matter submitted to a shareholder vote requiring that such standard be satisfied for any such matter to be approved, including any offer by Sun ultimately accepted by the Special Committee and submitted for shareholder approval.
The Special Committee must reject Sun's offer as Taro lacks the internal controls and procedures we believe are necessary to protect minority shareholders by upholding the integrity of the "majority of the minority" voting standard that would be required to be satisfied to approve Sun's offer when votes are counted
2. Despite the efforts of Taro's management (controlled by Sun) to temper enthusiasm for Taro's strong financial results by highlighting the potential lack of sustainability of Taro's performance, recent IMS prescription data and pricing through the end of March show that Taro's sales and pricing continue to be strong and show no signs of slowing down. Rather than reiterating here the other reasons we have submitted previously for your consideration indicating why Taro's robust financial performance is indeed sustainable, we refer you to our letter dated February 15, 2012.
3. When evaluating acquisition proposals, special committees, aided by their financial advisors, usually perform a careful analysis of comparable transactions. We assume that the Special Committee and its financial advisor have performed such analysis in the course of evaluating Sun's offer and are aware that high-margin generic drug manufacturers like Taro are positioned to command significant acquisition premiums. For instance, just last week, Fougera Pharmaceuticals Inc. ("Fougera"), Taro's most direct competitor, announced that it will be acquired by Novartis International AG / Sandoz based on a 8.8x EBITDA multiple during the second half of 2012. The media has highlighted that Fougera (like Taro) operates a highly profitable business with higher barriers to entry relative to the rest of the generic drug space. We believe the multiple used in Fougera's acquisition is indicative of the type of premium that Taro would command in a properly run sale process and highlights what the market already knows – that Sun's offer is opportunistic, grossly inadequate and an affront to Taro's minority shareholders.
In addition, in a prior letter to you we suggested that Taro's improved and sustainable performance is in part due to the increasing trend towards consolidation in the generic drug space. The recently-announced Fougera acquisition illustrates our point further. Now that Fougera is being merged into a large multi-national, the scarcity value of the remaining players in the generic drug space has increased in this consolidating industry. As the trend towards such consolidation continues, Taro shares become increasingly valuable as the most direct way for investors to participate in the growth of the generic dermatology business.
4. As highlighted in previous IsZo letters, Taro is the most valuable part of Sun's business and makes up at least 40 to 50% of Sun's USD $11.6 billion market cap. Taro's competitive position is much stronger than any of Sun's other divisions. For example, on average, Taro has a 50% market share in its top 18 products which make up the majority of sales and profits. Sun's market share is extremely weak in comparison.
The Special Committee must reject Sun's offer as inadequate given that Taro's strong financial performance is sustainable and accounts for most of Sun's market value while Sun's offer opportunistically fails to reflect a corresponding premium
In previous letters, we had urged the Board of Directors and management of Taro to pursue certain value-maximizing strategies, which included the re-listing of Taro's shares on a national securities exchange in the United States. One reason we advocated for this strategy is that as long as Taro's shares continued to trade in small volumes on the pink sheets while orphaned by sell-side analysts without periodic management communications with the market, the shares would continue to trade at a severe discount. We commend the Board of Directors and management for re-listing Taro's shares on the New York Stock Exchange, but more is needed.
We urge the Special Committee to decisively reject Sun's offer immediately to signal to the market that the Special Committee is serious about protecting the interests of Taro's public shareholders and remove the uncertainty holding back the price of our company's shares from achieving their potential. We also urge management to implement a new policy of greater engagement with the investor community by kick-starting on-going discourse with Taro's public shareholders and analysts following Taro and taking advantage of opportunities to share with the market the promising developments at our company, including by participating in industry conferences. We believe the actions outlined above will protect and enhance our company's value for all shareholders.
IsZo Capital remains committed to realizing the value of its investment in Taro and will continue to monitor the Special Committee's deliberations concerning Sun's grossly inadequate offer as well as other aspects of the management of Taro and its business. We remind the Special Committee that it was appointed to protect the interests of all shareholders and, based upon all of the foregoing, cannot in good faith or in the informed discharge of its fiduciary duties, accept Sun's grossly inadequate offer.
IsZo Capital reserves all rights under Israeli law, U.S. law and otherwise in connection with the foregoing, including the right to assert a claim for any damages or costs IsZo Capital may sustain or incur in connection with the Special Committee's management of the Sun offer process.
Sincerely,
/s/ Brian Sheehy
Brian Sheehy
Managing Partner
IsZo Capital
Contact: Brian Sheehy, Managing Partner, IsZo Capital, 646-775-4934
SOURCE IsZo Capital
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