– As Brain Changes, so can IQ: Learning doesn’t end
– China’s Grand Strategy: Contrary to what you read in the Western media, China has a history of long-term planning and an approach that has been in place for years
– The Science of Irrationality: New book from Daniel Kahneman. A good argument for having an investment checklist
– The making of an entrepreneur: Richard Heckmann talks about his making of an entrepreneur and his experience with doing M&As.
– Trouble at Fairholme: A look at Charlie Fernandez’s time at Fairholme
– Gold ATM: Did someone say bubble?
– The decline and fall of America’s decline: Stories of America’s decline are exaggerated
– Paulson’s tough year: Tough year for investors that were early in financials
– Decision Making flaws: The characteristics that causes decision making flaws in powerful people
– Coming inflation in UK: A hedge fund manager expects high inflation for UK
Grand Slam Asset Management has written a letter to Taro Pharma regarding the Sun Pharma offer price. We know that the offer of $24.50 is a discount to fair value of Taro. Similar to what happened to Caraco, I expect Sun Pharma to raise their offer once an independent committee does fair valuation for Taro.
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.
– Why do some people learn faster: I’m a big fan of Carol Dweck’s research
– What I learned from Steve Jobs: Great insights from Guy Kawasaki
– Longacre to lose hedge fund: We should see more hedge funds close shop this year, might create some buying opportunities
– Indians taking over hotels in vacation areas: Distressed asset buying yields more than cash sitting in savings accounts
– Sprint bets the company on iPhone: I’m shocked at management’s dumb decision making.
– North Dakota’s oil boom: Fracking has created a huge boom in oil and gas
– Euro break-up: The Consequences: Great report on the cost of Euro break-up
– Finding Value in Hard-Hit European companies: Good time to look for European companies that have great assets and business operations in Europe and Emerging markets
– Longleaf Q3 letter: Always good to hear their thoughts