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Bull Case(Disclosure: I am long TARO)
1. TARO gets valued more closer to its market peers like Perrigo at EV/EBITDA multiple of 15 instead of the current deeply discounted price it trades at <6. Agila Specialties, a generic pharma was sold to Mylan for ~19 times EBITDA. Taro at Agila's transaction multiple would be ~$180 per share.
2. TARO's operations continue to strengthen and the drug price increases sustain. Dermatology/Topical sector is a niche segment and it is not easy to file ANDA's due to the complexity.
3. TARO's majority shareholder's cash position significantly worsened after the $550m protonix judgement and it may find it very hard to finance a TARO acquisition. This will imply no more immediate overhangs of any future offers from majority shareholder.
4. TARO buyout requires majority of minority vote. Hence majority will not be able to railroad minority.
5. Many of TARO's shareholders are informed value investors and recognize the deep discount prevailing in NYSE price of TARO due to the various reasons(including but not limited to #7). Hence their vote on any strategic transaction will likely be an educated one. Here is a letter from an active institutional shareholder
6. TARO's minority are legally entitled to fair value in case of a buy out. See Southern Peru copper mining where minority won damages (amounting to "fair value" minus "buy out price") against the controlling shareholder. Recent transactions including acquisition of Agila Specialties by Mylan at 19 times EBITDA multiple bodes well for TARO in case of a buy out.
7. TARO's shareholders file a proxy to get minority representation on the board. A lot of shareholders(including "United shareholders of TARO", a grass-root group of 40+ active shareholders who came together on internet message boards/blogs) have asked for the below:
- TARO get minority representation on the board. TARO's appointment of chairman of audit committee requires majority of minority vote per 2011 Israeli law.
- TARO improves its investor relation practices: Starts conducting earnings call, Attending investor conferences, Conducts investor day, Gets Wall street coverage. On an average a NYSE listed company of size of Taro, conducts 4 earnings call, goes to 6 investor conferences in a year and is covered by ~3-5 wall street analyst firms.
- TARO improves its corporate governance by including a "go shop" provision in case of any future buy out from majority and a mandatory exploration of all strategic alternatives
- TARO starts opportunistically using its $640m in cash (est by end of June 2013) to make strategic product or company acquisitions
9. TARO gets a 13D Activist investor ( Somebody like Bill Ackman, Carl Icahn or Mark Rachesky )
1. TARO's experiences pricing pressure in its top selling drugs and revenues decline significantly. We think this is unlikely considering the FDA delays for new ANDA's , the complexity for filing topical/dermatology ANDA's and the economic incentives to support competition. For example, there is almost zero competition(Glenmark is the only company) from India in the generic dermatology business, although the Indian pharma companies are dominant players in the US generic pills market.
2. TARO continues with its current IR practices: No earnings call, No investor conferences, etc. TARO will not bring in corp governance improvements including "go shop" provision and exploration of ALL strategic alternatives in case of a minority buy out. Hence TARO shares will continue to be shunned by most market participants and relegated to its status of boring, low volume and trade with "overhang of fear" discount to intrinsic value.
3. TARO will never get a 5% 13D activist investor due its extremely low volume.
4. TARO stock will experience selling pressure from special situation funds that were expecting M&A soon. With SUN's reduced cash position, any buyout of minority in near term is very unlikely.
5. TARO's minority shareholders will not propose their nominees.
7. Majority shareholder somehow is able to get majority of minority vote at acquisition prices that is less than market peer multiples and minority shareholders are muted.