ET had reported Torrent’s approach to PE funds including Bain Capital to form a larger consortium September 1. Torrent is still engaged with Bain on being a possible co-investor, but is likely to opt for CVC as its lead partner, said the people cited above.
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Torrent is also engaged with Brookfield to raise $1-1.2 billion (Rs 8,300-9,000 crore) mezzanine debt as share-backed promoter financing. Torrent’s founders, the Sudhir and Samir Mehta family, own 71.25% as promoters. That’s among the highest promoter ownership in Indian pharma and they are seeking to use that headroom to dilute equity to raise leverage. Their plan is to create a non-disposable undertaking (NDU) using the shares as collateral for loans. An NDU is different from pledging of shares. Under an NDU, an entity can sell the stocks unlike pledging, which prevents the sale of shares.
Large debt and equity dilution needed
The quantum of funds have not yet been finalised as Torrent has cast its net wide to organise funds, with a plan to close this by September end, before going ahead with an offer. The people mentioned above said both CVC and Brookfield can raise their commitments to as much as $2.25 billion (Rs 18,675 crore) and $1.5 billion (Rs 12,450 crore), respectively, if Torrent’s talks with other capital pools including domestic shadow banks and mutual funds fail to yield any results.“The company was looking at raising a minimum of $750 million to as much as $2.25 billion through equity. The range is due to the uncertainty over how much of the open offer will be subscribed to. But one needs to show committed financing during submission of a firm offer,” said a person aware of the ongoing negotiations. “If Bain and CVC both partner up with Torrent, then that will also influence the outflow.”A clutch of foreign banks — Standard Chartered Bank, Barclays, MUFG, Citi and Morgan Stanley — are in parallel signing up for a senior debt facility of Rs 30,000-32,000 crore ( $3.8 bn) for three years against the cash flows of Torrent and Cipla.“The acquisition will require large debt and equity dilution. With strong cash flows of Cipla and Torrent, and high promoter stake in Torrent Pharma, we think the deal can be consummated,” said Salon Mukherjee of Nomura. “The Torrent promoters can retain 48-63% in Torrent Pharma post acquisition. Assuming leverage of 3-5x FY25 ebitda, we estimate Torrent could potentially raise approximately Rs 10,000-20,000 crore of debt. Assuming Rs 10,000-20,000 crore of infusion by Torrent’s promoters, it would require an additional Rs 20,000-40,000 crore equity infusion from PE investors and other other investors.”
Torrent’s current debt-equity ratio is 0.9:1 and is expected to be 0.6-0.7:1 by end FY24. For most of the past years, this has been lower than 1. Thus, analysts see scope for raising further debt to fund the deal. On Friday, the Torrent’s market value was Rs 63,289.84 crore.
Torrent didn’t respond to queries. CVC and Bain were unavailable for comment. Brookfield declined to comment.
Eclipsing the $26 billion buyout fund raised by Blackstone in 2019, CVC Capital Partners raised $29 billion for the largest private equity fund in history this July, defying a broader fundraising crunch that has left peers struggling to raise new pools of capital. Spun out of Citi, CVC owns marquee sporting assets and brands such as football league La Liga, the Women’s Tennis Association, the IPL team Gujarat Titans, and watchmaker Breitling. One of its most profitable exits has been selling the Formula One franchise to Liberty Media in 2016. Bain too has been on a deal-making spree in India in recent times.
Torrent was ideally planning to close in on its negotiations with its PE partners last week but talks have dragged on. The volatility of the Cipla stock — up 16% since CNBC-TV18 reported on July 27 that the Hamied family was likely to sell part of its stake — and the expectation of a control premium on top of that may also turn out to be deal breakers, warned people directly involved.
Cipla’s promoters, the Hamied family led by YK Hamied, own 33.47% of the company. The current market value of Cipla has been hovering at the Rs 1 lakh crore range. At this price, the promoter stake alone is valued at Rs 33,389 crore ($4.02 billion). If the open offer for an additional 26% that has to be held under the takeover rules is fully subscribed, Torrent may end up paying a total Rs 59,236 crore ($7.14 billion) for a 59.47% stake in the 88-year-old pharma company, India’s third-largest generics company by revenue.