The Hindu Business Line : Matrix-Mylan: Accept

Investors can accept the open offer being made at Rs 306 by the US-based Mylan for an additional 20 per cent stake in Matrix Laboratories. Though the offer price is at a marginal, 12 per cent, premium to Matrix's current price, we believe that it is still a good exit opportunity. As Mylan begins to increasingly source products from Matrix and leverages the latter's cost-competitiveness, we do not see any significant upside accruing to Matrix shareholders.

Background

In August, Mylan decided to acquire a 51.5 per cent stake in Matrix from the promoter, Mr N. Prasad, and a couple of investment outfits. The current offer is to follow-up the earlier acquisition, and is for a further 20 per cent stake.

Rationale

Even at the time of the acquisition, we had argued that Mylan's move should be perceived as an attempt by large generic players to capitalise on the cost-advantages and the talent pool that India offers. If Mylan were to leverage the competencies that Matrix brings to the table, we believe that it would certainly be a beneficial arrangement for shareholders of the former; not the latter.

If Matrix shareholders should benefit, that would only stem from the company maintaining healthy margins, which is contingent on a profit-sharing arrangement with Mylan. We think that the odds on such an event are low; such an arrangement would be similar to a relationship with any other vendor and would run counter to the idea of Mylan having made a significant strategic investment in Matrix. This leads us to believe that Matrix will emerge as a key sourcing base for Mylan, with clear cost-benefits for the latter.

On the products side, we observe there is little overlap between the portfolios of Matrix and Mylan. The synergies do go up a tad if one were to account for the string of acquisitions that Matrix had put through over the past year. This would mean that if Mylan decides to step up its sourcing from India, it would only mean higher costs for Matrix. The Matrix management has already guided for higher R&D expense in the second half of the ongoing fiscal compared to the first (which has seen an almost three-fold jump to Rs 40 crore compared with the year-ago period).

We also note that Matrix has a custom research and manufacturing business, under which it has engagements with several leading pharma outfits. The contours of this business after Mylan steps into the equation would also bear close watching. At the offer price of Rs 306, Matrix would be valued at 26-27 times its trailing four-quarter per-share earnings, which is not undemanding, in our view. The stiff valuation level would be another reason why investors should consider participating in the open offer.

Offer details

The offer is for mopping up about 3.1 crore fully paid-up and 4,700 partly paid-up shares at Rs 306 and Rs 294 respectively. DSP Merrill Lynch is the manager to the offer, which opened on November 22 and closes on December 11.

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