South African healthcare group Adcock Ingram Holdings Ltd has abandoned a planned 2.1 billion rand ($260 million) acquisition of Cipla Medpro South Africa Ltd, after Cipla India, its principal supplier, threatened to cancel a supply agreement.

Adcock Ingram had, on 9 April, announced its intention to make an open offer to acquire the entire issued share capital of Cipla Medpro SA (CMSA).

Adcock said it decided to drop the takeover plan after it came to know of an alleged termination right held by Cipla Ltd over its supply pact with CMSA. The generic drugs company hadn't publicly disclosed it, Adcock said in release.

The Johannesburg Stock Exchange is investigating the matter, Adcock added.

Adcock said, in its view, there was now no reasonable prospect of a key suspensive condition to the proposed transaction being fulfilled, and that Adcock was not prepared to waive the suspensive condition in question.

Adcock said it has obtained the consent of South African regulators for the proposed acqusition, but, highlighted concerns over the supply clause to support its decision not to proceed with the acquisition.

Adcock said CMSA has failed to give its views on the merits of the proposed transaction, despite its public undertakings to do so. Instead, it placed the stated opposition of its principal supplier, Cipla India, at the forefront and has attempted to discourage Adcock from proceeding with the proposed transaction.

''Claims have been made regarding an alleged "termination right" which Adcock is not aware was previously disclosed to the market,'' it said, adding ''The JSE is now investigating this matter.''

Adcock said its board of directors has repeatedly requested the CMSA board to provide its view on the merits of the proposed transaction. Despite its public undertakings to do so, the CMSA board has yet to respond to the merits of the `firm intent notice.' Instead, the CMSA board focused attention on the stated opposition of CMSA's principal supplier, Cipla India, to the proposed transaction with a view to discouraging Adcock in proceeding with the proposed offer, it added.

''While Adcock recognises the value of CMSA's relationship with Cipla India, Adcock has consistently maintained that it would seek the formal support of Cipla India at the appropriate time – which would be after the CMSA board had published its views on the merits of the proposed transaction to CMSA shareholders,'' the release said.

''Adcock believes that if the CMSA board is of the opinion that the proposed transaction represents a fair opportunity for CMSA shareholders, it would be the CMSA board's responsibility to persuade Cipla India to reconsider its view,'' it noted.

The release, however, said Adcock's CEO Jonathan Louw had met Cipla India's joint managing director Amar Lulla, on several occasions over the past two years to discuss the mutual benefit of a possible merger of Adcock and CMSA.

''If Adcock Ingram is ready to continue with the existing arrangement, we will continue with the supplies,'' the release quoted press reports as saying immediately after the publication of the firm intention announcement.

''This statement was welcomed by Adcock as being consistent with Dr Louw's understanding of his prior discussions with Mr Lulla,'' the release added.

On 17 April, however, Lulla stated publicly that Cipla India was not supportive of Adcock's proposed offer. Immediately after the release of Lulla's statement, CMSA issued its second announcement in which it also confirmed that Jerome Smith, CEO of CMSA, was opposed to the proposed offer.

In early May, Adcock received a copy of a letter addressed to Louw by Lulla. This letter advised Adcock that both Lulla and the board of directors of Cipla India did not support the proposed transaction.

Adcock said as it understands now, the entire contractual relationship between CMSA and Cipla India was governed solely by a written supply agreement, concluded on or about 26 September 2005. The terms of the Cipla India agreement have never been publicly disclosed by CMSA, except for a summary of salient terms contained in a limited information memorandum dated October 2005. Having reviewed the supply agreement summary and all subsequent public communications by CMSA, Adcock was not aware of any issues in the Cipla India agreement that could prejudice the proposed transaction.

Adcock, therefore, noted with concern media statements attributed to Lulla that Cipla India has the right to terminate the Cipla India agreement upon a ''change of management'' of CMSA. Adcock has also noted that CMSA has not publicly challenged or questioned this interpretation. Instead it implicitly confirmed the risk of such termination. The existence of this termination right would have a material effect on the market for CMSA shares and any potential offer for CMSA, it added.

Adcock has also formally requested JSE to investigate whether the Cipla India agreement contains such a termination right, which would in effect grant Cipla India negative control over the major operations of CMSA, and whether this was properly disclosed to CMSA shareholders. The JSE is in the process of investigating the matter.