JOHANNESBURG/MUMBAI (Reuters) - Cipla Ltd(CIPL.NS) has put on hold a $215 million bid for control of South Africa’s Cipla MedproCMPJ.J, signalling it may be unwilling to sweeten its offer for the drug firm.
Cipla, which has a supply agreement with the Cape Town-based company but has never owned a stake in it, in November offered to buy 51 percent of Cipla Medpro to gain a bigger foothold in Africa’s growing market for low-cost drugs.
But just days after the offer, Cipla Medpro won a 1.4 billion rand contract from the South African government to supply HIV/AIDs drugs to local hospitals, sparking speculation the Indian firm would have to increase its bid.
Cipla Chairman YK Hamied told Reuters on Monday the company had put on hold talks to buy South Africa’s third-largest seller of generic drugs, confirming an earlier media report.
Hamied did not give a reason for the stalled talks, but some analysts said it was likely over valuation.
“The initial valuation of about two times the sales of Cipla Medpro was quite reasonable, as Cipla was planning to expand its reach across Africa,” Daljeet Kohli, head of research at Mumbai-based brokerage IndiaNivesh.
“Anything beyond this range of valuation was not justifiable as there was no value addition happening to the existing business. Maybe, that is why Cipla has decided to rethink.”
Cipla had said it would offer 8.55 rand a share for Cipla Medpro. The target’s shares, which had risen as high as 9.50 rand on speculation of a sweeter bid, were down as much as 7.4 percent after Hamied’s comments and were 4.4 percent lower at 8.99 rand by 1404 GMT, still above the offer price.
Cipla Medpro said it had not received any official word from its Indian affiliate about its decision to suspend talks.
“We have not received any communication from Cipla Ltd about its withdrawal from the talks,” Johan du Preez, Cipla Medpro’s acting CEO, told Reuters.
Cipla supplies the bulk of Cipla Medpro’s drugs under an agreement spearheaded by the South African firm’s founder and former CEO, Jerome Smith.
Smith quit last year following board accusations he had taken loans and other financial assistance from his company without proper approval. He is now taking legal action against Cipla Medpro.
There has been speculation Smith’s departure could affect the relationship between the two companies. However, one fund manager said the supply agreement would likely remain intact.
“Cipla might have decided that the valuation of Cipla Medpro is now too high, but South Africa is still an attractive market for them and it would make sense to keep the supply agreement even if the deal collapses,” Laurie Slatter, a fund manager at 36ONE Asset Management in Johannesburg.
The market for generic drugs - cut-price versions of drugs that are no longer under patent protection - is growing in South Africa as the government aims for a national health insurance scheme heavily reliant on low-cost medicine.
Editing by David Dolan and David Holmes