IHS Global Insight Perspective | |
Significance | Adcock Ingram (South Africa) has withdrawn its bid to acquire Cipla Medpro South Africa (CMSA). |
Implications | Cipla (India)'s opposition to the deal, and claims of a termination clause in the CMSA–Cipla supply agreement upon any change in management, has seen Adcock forced to rein in its attempt to acquire CMSA. |
Outlook | The development is not at all surprising, as CMSA's supply agreement with Cipla is a significant source of revenues for the former. Any termination of this would have seen CMSA's generic product portfolio, domestic market share, and hence valuation severely dented. |
Adcock Announces Withdrawal of CMSA Acquisition Bid
South African drug major Adcock Ingram has announced that it will not proceed with its bid to acquire domestic counterpart Cipla Medpro South Africa (CMSA). Its decision to withdraw its offer was based on the fact that CMSA has not viewed the merits of the acquisition and has instead placed the opposition of long-time supplier Cipla (India) at the forefront of the deal.
However the key reason behind Adcock's decision to withdraw has been claims made by CMSA and Cipla regarding the terms of their long-term agreement. According to Amar Lulla, Cipla's joint managing director, the Indian firm had the right to terminate the agreement with CMSA upon a change of management, with the latter confirming this in an announcement to the Johannesburg Stock Exchange dated 4 May 2009. While Adcock management has been made privy only to the salient terms of the indicated contract, its review of theses terms did not indicate any such clause, revealed Dr Jonathan Louw, Adcock's Chief Executive Officer (CEO). Nonetheless, Louw noted that such a termination clause would affect CMSA's valuation and shares adversely. Additionally, such a clause would also activate one of the "suspensive conditions" written into Adcock's bid for CMSA offer. This states that it is eligible to terminate the proceedings of the acquisition if the Cipla-CMSA relationship does not continue in full force as prior to the takeover.
Investigation Launched
Adcock's has reportedly asked the Johannesburg Stock Exchange to investigate whether the supply contract between Cipla and CMSA does contain the aforementioned termination clause as claimed. The stock exchange is looking into the matter.
Meanwhile, Louw also expressed disappointment over Adcock's withdrawal from acquiring CMSA. Adcock's complete press release on the matter can be viewed here.
Outlook and Implications
Adcock's decision brings to an end its "firm intention" to acquire CMSA, which it made public in April this year. The deal was valued at US$228 million and received shareholder approval of 36.1%. While there were various media reports concerning Cipla's position on the bid, a formal letter of opposition by Lulla to Adcock clarified the Indian company's stance (see South Africa - India: 7 May 2009: Adcock Vies for CMSA Despite Cipla Opposition). While Cipla is not a stakeholder in CMSA, the supply agreement is a dominant revenue generator for the latter. Therefore, reports of CMSA CEO Jerome Smith opposing the offer, CMSA's hesitance, and now Adcock's withdrawal from the whole process have come as no great surprise. Cipla's dominance within the CMSA relationship comes as a result of the technological and manufacturing know-how, and the generic product portfolio that they provide to CMSA. Therefore, if Adcock had not voluntarily withdrawn, it is likely that it would have faced dwindling CMSA shareholder approval for the deal.
The current development means the CMSA board of directors' sub-committee that was formed to consider the acquisition bid will shortly be disbanded. It also means that, for now, Aspen Pharmacare (South Africa) continues to clearly lead the South African market (in terms of value). The merger of Adcock and CMSA would have meant a significant narrowing of that market gap, although Aspen would still have maintained a lead.
Related Articles
- South Africa: 17 April 2009: South African Pharma Industry to Consolidate as Adcock Sets Sights on Cipla Medpro
- South Africa: 20 April 2009: Cipla Medpro Contemplates Adcock's Offer