Cipla acquisition: Report warns of EPS dilution despite funding as Torrent Pharma and Dr Reddy’s eye pharma major

While Torrent Pharma and Dr. Reddy’s Laboratories are vying to acquire Cipla Ltd, executing this deal could result in medium-term earnings per share (EPS) dilution for both pharmaceutical giants, a report by Kotak Institutional Equities released on Thursday said.

This is despite their ability to secure the necessary funds through equity raises and substantial debt accrual, the brokerage firm said. The potential acquisition has stirred interest in the pharmaceutical sector, and analysts are closely evaluating the impact and feasibility of such a deal.

Kotak Institutional Equities conducted an analysis of the expected acquisition, considering various aspects such as portfolio overlap, funding sources, possible synergies, and the net EPS impact.

Assuming the deal takes place at the current market price (CMP), the buyer would require approximately $7.3 billion to acquire Cipla’s promoters’ 33.5% stake and complete the 26% open offer, assuming 100% subscription. For Torrent Pharma, this would involve a $2.8 billion equity infusion and a gross debt accretion of $4.3 billion. For Dr. Reddy’s, it would require a $2.6 billion equity infusion and a gross debt accretion of $3.9 billion.

In a base-case scenario, where a 100% subscription to the open offer and a 5% synergy-led EBITDA boost are assumed, Kotak Institutional Equities predicted a 7% and 4% EPS dilution in FY2025E for Torrent Pharma and Dr. Reddy’s, respectively, in case either of them successfully acquire Cipla.

Kotak analysts also highlighted the limited portfolio overlap between the companies. Torrent Pharma strengths in cardiac, gastro, and Central Nervous System (CNS) medicines complement Cipla’s strengths in respiratory and anti-infectives. The brands with overlap have relatively small market shares, reducing the risk of divestments.

Furthermore, the international overlap is minimal, with Cipla’s strong presence in South Africa complementing Torrent Pharma’s presence in Brazil. This limited overlap suggests that the acquisition may not yield significant synergies.

Despite Dr. Reddy’s being the larger company, Torrent Pharma has certain advantages due to its higher promoter shareholding and its stake in Torrent Power.

Additionally, the involvement of promoters in day-to-day operations is more active in TRP compared to Cipla and Dr. Reddy’s, potentially aiding in smoother integration, the Kotak Institutional Equities report said.

Kotak Institutional Equities maintained their “reduce” ratings on Torrent Pharma and Dr. Reddy’s but maintains an “add” rating on Cipla. The outcome of this potential acquisition will likely depend on various factors, including the deal price and the strategies of the acquiring company, the brokerage firm said.