The promoter family of generic drug maker Ranbaxy, the Singh family, which is also the largest and controlling shareholder of the company, has entered into a deal with one of the largest pharmaceutical companies in Japan, Daiichi Sankyo, to sell its majority stake in Ranbaxy, in a transaction that values it at $8.5 billion.

Ranbaxy and the Singh family have signed a binding share purchase and share subscription agreement (SPSSA) with Daiichi Sankyo, enabling the Japanase pharmaceuticals firm to acquire the entire shareholding of the Singh family in Ranbaxy and at Rs737 per share amounting to a total transaction valueDaiichi's offer for Ranbaxy amounts to $2.7-3.7 billion at current exchange rates.

Daiichi Sankyo will also make an open offer to acquire controlling stake of 51 per cent in the company at Rs737 per share. The total transaction value is expected to be between $3.4-4.6 billion and would value Ranbaxy Laboratories at $8.5 billion.

Under the deal, Daiichi Sankyo will buy the entire 34.8 per cent controlling stake of Ranbaxy's founders, the Singh family, and also launch a bid to buy shares from the market.

The SPSSA has been approved by the boards of both companies and the transaction is expected to be completed by end March 2009.

"The proposed transaction is in line with our goal to be a global pharma innovator and provides the opportunity to complement our strong presence in innovation with a new, strong presence in the fast growing business of non-proprietary pharmaceuticals," said Takashi Shoda, president and CEO, Daiichi Sankyo Company, Limited.

This purchase price represents a premium of 53.5 per cent to Ranbaxy's average daily closing price on the National Stock Exchange for the three months ended 10 June 2008 and 31.4 per cent to its closing price on 10 June 2008.

Daiichi Sankyo expects to acquire the majority equity stake in Ranbaxy through a combination of purchase of the Singh family's shares, a preferential equity allotment, followed by an open offer to the public shareholders for 20 per cent of Ranbaxy's shares, and by exercising a portion or all of the share warrants to be issued on a preferential basis. The Japanese firm will acquire all shares and warrants at the same price it is paying the promoters.

Shoda said the complementary combination represented a perfect strategic fit and would deliver a considerable opportunity for the future growth of the new Daiichi Sankyo Group.

"While both companies will closely cooperate to explore how to fully optimise our growth opportunities, we will respect Ranbaxy's autonomy as a standalone company as well," he said. "We respect and believe in the management skill of Malvinder Mohan Singh and we are happy that we can invite him to be a member of the senior global management of Daiichi Sankyo, while he continues to lead Ranbaxy as its CEO and Managing Director; additionally, upon closing he would assume the position of chairman of the board."

The closing of the transactions is subject to customary shareholder and regulatory and statutory approvals. The two companies expect the transaction to be completed by the end of March 2009. Upon completion of the acquisition, Ranbaxy will become a subsidiary of Daiichi Sankyo.

The purchase propels Daiichi Sankyo to ninth in the $120 billion generic-drug market behind leaders Teva Pharmaceutical Industries Ltd. and Novartis AG's Sandoz unit. Daiichi Sankyo is mimicking strategies pursued by the Swiss pharmaceuticals company and Johnson & Johnson to weather turbulence in the branded-drug industry by diversifying into other markets. The acquisition also gives the Japanese company more reach in emerging regions including India, China and Eastern Europe.

In addition to continuing as CEO and managing director, Malvinder Singh will also become chairman of the board and also join the senior global management of Daiichi Sankyo, upon closure of the transaction.

Singh said the deal was a significant milestone in Ranbaxy's mission of becoming a research-based international pharmaceutical company.

 "I am delighted to announce our association with Daiichi Sankyo, a leading research-based pharmaceutical company that puts us on a new and much stronger platform to harness our capabilities in drug development, manufacturing and global reach," said Singh. "Together with our pool of scientific, technical and managerial resources and talent, we would enter a new orbit to chart a higher trajectory of sustainable growth in the medium and long term in the developed and emerging markets organically and inorganically."

The companies say the transaction would create significant long-term value for all stakeholders through:
A complementary business combination that provides sustainable growth by diversification that spans the full spectrum of the pharmaceutical business;

An expanded global reach that enables leading market positions in both mature and emerging markets with proprietary and non-proprietary products;

 Strong growth potential by effectively managing opportunities across the full pharmaceutical life-cycle; and Cost competitiveness by optimising usage of R&D and manufacturing facilities of both companies, especially in India

The transaction will be accretive to Daiichi Sankyo's EPS and operating income before amortisation of goodwill in the fiscal year ending 31 March 2010 (FY2009). EPS and operating income after amortisation of goodwill are expected to see an accretive effect in FY2010 and FY2009, respectively.

The Japanese company has been looking at India from an Active Pharmaceutical Ingredients (API) perspective. A couple of years ago, GVK Biosciences had sold some stake to Daiichi and that was the beginning of Daiichi in India.

Nomura Securities Co Ltd., the Japan-headquartered investment bank, acted as the exclusive financial advisor, Jones Day as the legal advisor outside India, P&A Law Offices as the legal advisor in India, Mehta Partners LLC as the strategic business advisor and Ernst & Young as the accounting and tax advisor to Daiichi Sankyo.

Religare Capital Markets Limited, a wholly owned subsidiary of the Ranbaxy-promoted Religare Enterprises Limited, is the exclusive financial advisor to Ranbaxy and the Singh family.

(See: This is the start of a much larger game)