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Sun Pharma to buy Ranbaxy for 3.2 Billion – The financial model behind valuating the company

April 11, 2014
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In one stroke Sun Pharmaceuticals has doubled its size in a cashless transaction by acquiring one of India’s largest pharmaceutical company – Ranbaxy in a $3.2 billion all-share deal, creating the world's fifth-largest generic drug maker from two firms struggling with quality issues in the lucrative United States market.

Sun Pharma took more than 30 years to achieve (inception in 1983) its present turnover and a single day to achieve the same turnover through this acquisition. The beauty of the transaction lies in the fact that a bigger sized company has been acquired without paying anything for it (in absolute rupee terms). The deal is a cashless share swap one where Ranbaxy shareholders get 80 shares of Sun Pharma for every 100 shares they own.

Sun Pharma

Sun Pharma Logo

Having a consolidated turnover of Rs 11,326.32 crore (March ending 2013), Sun Pharma acquired a larger company Ranbaxy with a turnover of Rs 12,410.43 crore (March ending 2013). The transaction done at a valuation of 2.2 times sales of Ranbaxy will make Sun Pharma the largest Indian pharmaceutical company by a wide margin.

Ranbaxy, India's biggest drug maker by sales and 63.4 per cent owned by Japan's Daiichi Sankyo Co Ltd, is banned from exporting drug ingredients to the US. Sun Pharmaceutical's Karkhadi plant is also barred from shipping products by the US Food and Drug Administration.

India's pharmaceutical industry, which supplies more than 20 per cent of the world's generic drugs, according to PricewaterhouseCoopers, suffers from a lack of oversight including a severe shortage of regulatory inspectors.

Daiichi has dispatched personnel and promised to provide the necessary support to resolve lingering quality problems at Ranbaxy, in which it first invested in 2008.

Under terms of the agreed deal, Ranbaxy shareholders will get 0.8 of a Sun Pharmaceutical share for each Ranbaxy share they own. Daiichi Sankyo said in a statement that it will hold a stake of about 9 per cent in Sun Pharmaceutical after the deal.

The deal values Ranbaxy shares at 457 rupees apiece, representing an 18 pct premium to their 30-day volume-weighted average share price. Ranbaxy shares rose by nearly a quarter over the previous three sessions to close at 459.55 rupees on Friday.

Tokyo analysts said the move doesn't necessarily signal a pullback from India by Daiichi Sankyo.

"I wouldn't call this an exit. It's an ownership transfer," said Jefferies & Co analyst Naomi Kumagai. "Another company will take over control for them of a place that had a lot of issues. In that sense, it should be a good thing."

So what made the deal cashless and what was the reason this deal seems fair to everyone?

When one company merges or acquires a company there is a process called valuation of the company which decides the amount of money to be paid to acquire the company and the amount of increase in shares and stakeholder values.

How has Ranbaxy's valuation been changing, first following the deal with Daiichi Sankyo in 2008 and now with the Sun Pharma acquisition? Daiichi Sankyo had valued Ranbaxy at $8.5 billion and for a 63.92 per cent stake paid Rs 19,804 crore or  $4.6 billion with the price for each share at Rs 737. At the time, the rupee was Rs 43 to a dollar. In the deal with Sun Pharma, the total equity value of the transaction is $3.2 billion with each Ranbaxy share priced at Rs 457. While the total equity value is $3.2 billion, taking Ranbaxy's debt into account, the transaction is worth over $4 billion.


Ranbaxy valuation chart

Now, under the deal with Sun Pharma, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy and the exchange ratio represents an implied value of Rs 457 for each Ranbaxy share and the transaction has a total equity value of approximately $ 3.2 billion.

But just on the basis of the depreciation of the rupee against the dollar, the Ranbaxy-Daiichi deal now would itself be valued much lower in dollar terms.

So how was valuation basically done for Ranbaxy ?

Step 1: Value acquirer and target as standalone firms

Step 2: Value acquirer and target firms including synergy

Step 3: Determine initial offer price for target firm

Step 4: Determine the combined firms’ ability to finance the transaction


Use the 5-forces model to understand determinants of profits and cash flow. Normalize 3-5 years of historical financial information. Project normalized cash flow based on expected market growth and changes in profits/cash flow determinants Consolidate acquirer and target projected financials including the effects of synergy. Estimate net synergy (consolidated firms less values of target and acquirer). Estimate minimum and maximum purchase price range. Determine amount of synergy willing to share with target shareholders. Determine appropriate composition of offer price. Estimate impact of alternative financing structures (e.g., debt/ratio ratios)

Select financing structure that

· Meets acquirer’s required financial returns and desired financial structure;

· Meets target’s primary financial and non-financial needs;

· Does not raise borrowing costs

· Is supportable by the combined firms’ operating cash flows.

A small hint on how to use financial modelling in the process

Ensure Excel’s Iteration Command is “on” to accommodate “circular references” inherent in financial models.

For example,

· To turn on the iteration command,

· On the menu bar, click on Tools >>> Options >>> Calculations

· Select Automatic and Iteration

· Set maximum number of iterations to 100 and the maximum amount of change to .01.

· Cash & Investments x Interest Rate Affects Net Income

· Net income Affects Cash & Investments


Financial Modelling is one the most fundamental and widely sought after skills in the finance industry. It is the art of building a model to depict financial statements and investment analysis using MS Excel. This helps arrive at optimal business solutions by analyzing various parameters. At the end of the course, You will be able to do the task of building a model depicting financial statements/ business model, which helps in decision making.


Learn how to construct an integrated financial model from scratch. You will soon be building models that are robust, and provide you with dynamic projections that can be used to thoroughly analyze a company from multiple standpoints: operations, investment, financing and valuation.


Financial Models constructed in Financial Modelling help in decision making and business modelling for firms and check the viability of projects. You learn techniques to value and analyze Firms, IPOs and FPOs in Financial Modelling. Investments in nascent stages can be valued with accuracy with hands on Financial Modelling for eg. Private Equity/ Venture Capital Investing.
Commercial Banks use Financial Modelling for disbursing loans for the projects; Project Management uses it for performance tracking of on-going projects.

Financial Modelling concepts can be applied to any industry. Individuals who hold an MBA and also possess knowledge of Financial Modelling have an edge over others.

To learn more about financial modelling Click here

To learn more about financial modelling in equity Click here

To read more blogs on interesting topics Click here

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About the Author

Roshan is a B.E (Hons.) from BITS Pilani and Director at BITSMUN society. Recently out of the student grid, he has good experience with current affairs and trends. He has worked with student bodies and organizations all over India and specializes in Model United Nations Emporiums.


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