Piramal Shunning Bankers Show India Challenge for Fees

Piramal Healthcare Ltd. Chairman Ajay Piramal
Ajay Piramal, chairman of Piramal Healthcare Ltd. Photographer: Dhiraj Singh/Bloomberg

Indian billionaire Ajay Piramal may spend $1 billion to acquire biotechnology and defense assets for his health care-to-real estate empire. Investment bankers are unlikely to get a share of that money.

“I don’t believe they add much value,” Piramal said in an interview in his Mumbai headquarters on April 20. “The banker’s incentive is to see that a deal gets done. So whether the deal is good or bad, he will push the deal for you.”

Piramal, 56, exacted an above-market valuation when he sold his Indian pharmaceuticals business to Abbott Laboratories for $3.8 billion in 2010 without using bankers, according to data compiled by Bloomberg. He’s now scouting for takeovers that will allow his Piramal Healthcare Ltd. to move from making generic copycat drugs to selling patent-protected medicines that typically require novel research and are more profitable.

The billionaire’s attitude toward bankers underscores the challenge facing global firms like Goldman Sachs Group Inc. and UBS AG as they try to squeeze revenues from a country where fees are a fifth of those in China, according to New York-based researcher Freeman & Co. The money banks earned from services such as arranging mergers, stock sales and bond offerings in India tumbled 25 percent last year, Freeman estimates.

Abbott’s acquisition of Piramal’s Indian business valued the unit at 8.7 times annual sales for fiscal 2010. That’s more than double the median valuation among 21 purchases of Indian pharmaceutical assets worth at least $100 million since the start of 2000, data compiled by Bloomberg show.

‘Sweet Deal’

“They cut a very sweet deal for themselves,” said Nitin Agarwal, a pharmaceutical analyst at IDFC Securities Ltd. in Mumbai. “Since then, we have not seen any other deal in pharma with that kind of size or valuation.”

Abbott was advised by Morgan Stanley, according to data compiled by Bloomberg.

Piramal Healthcare shares were trading at 437.95 rupees at 11:30 a.m. local time. They have risen 17 percent this year, in line with gains in the BSE India Healthcare Index.

All six Indian companies that were involved in cross-border deals of at least $500 million in the past year used financial advisers, data compiled by Bloomberg show.

“Advisers provide introductions, give companies perspective on the markets they are entering, provide tactical advice and bring experience in doing deals in those regions,” said Aisha De Sequeira, the local head of investment banking at Morgan Stanley, the top-ranked mergers adviser India in the past 12 months.

Ranbaxy Settlement

Piramal pointed to Daiichi Sankyo Co.’s $4.6 billion purchase of a majority stake in Ranbaxy Laboratories Ltd. as an example of inbound acquisitions that have “had issues.”

Three months after Daiichi agreed to the investment in June 2008, the U.S. Food and Drug Administration barred imports from the Indian drugmaker’s Paonta Sahib and Dewas plants in north India because of manufacturing defects. In February 2009, the agency said it halted reviews of new products from one of Ranbaxy’s factories because the company falsified data about the products’ shelf life. The dispute was resolved in December, after the Indian company agreed to a $500 million settlement with the FDA.

Nomura Holdings Inc. and ICICI Securities Ltd. advised Daiichi on the transaction. Spokesmen for both investment banks in Mumbai declined to comment on the deal.

Deals not involving bankers have also run into difficulties. France’s biggest drugmaker Sanofi didn’t employ an adviser when it spent $721 million to acquire Indian vaccine maker Shantha Biotechnics Pvt. in July 2009.

Fee Underperformer

Eight months after the purchase, the World Health Organization suspended its approval for Shantha’s combination vaccine used to prevent five childhood diseases in poor nations, after impurities were found in some batches.

“The issue on our pentavalent vaccine, Shan5, has been sorted out,” Shantha Chief Executive Officer Harish Iyer said today in an e-mailed response to questions from Bloomberg News. “We are likely to sell the vaccine in India in late 2013 and expect to commence exports in early 2014.”

India, a nation of 1.2 billion people whose economy grew an estimated 6.9 percent last fiscal year, has underperformed as an investment-banking market as large initial public offerings yielded near-zero fees and state-owned companies in the coal and metals industries struggled to get approvals for overseas takeovers.

Six investment banks split a fee of 1,548 rupees ($29.5) to manage the October 2010 initial share sale of Coal India Ltd., India’s largest IPO.

Never Say Never

For all of Piramal’s reservations against bankers, he won’t always refuse to hire them. UBS advised Piramal Healthcare on its acquisition of Rx Elite Holdings Inc. for $4.2 million in 2009, according to data compiled by Bloomberg.

“It’s not like we never have bankers, but by and large we don’t believe in that,” Piramal said. “I think we have that strength in our group to get a direct relationship with the buyer or seller.”

Piramal Healthcare acquired Bayer AG’s molecular imaging portfolio, the company said in a statement this month. Piramal didn’t hire advisers for the purchase, which includes rights to florbetaben, an experimental tracer which may be used to detect Alzheimer’s disease.

The group is also planning to purchase a company in the defense business to provide surveillance technology to the Indian armed forces or other government agencies, Piramal said.

“Investment would be international, but part of it will be serving the Indian domestic market,” he said.

In-house Teams

Piramal Healthcare bought an 11 percent stake in Vodafone Group Plc’s Indian unit for $1.21 billion without help from bankers. The investment is for the “short term” and an exit through an initial public offering or some other means may happen in 12 to 18 months, Piramal said in February.

Last year’s fee drop in India -- to $810 million -- was more than eight times steeper than the 3 percent decline globally, according to Freeman. China yielded advisory revenues of $4.3 billion, making it Asia’s largest market, Freeman estimates. The value of acquisitions involving Indian companies fell 45 percent last year to $39 billion, according to data compiled by Bloomberg.

Large Indian companies with in-house M&A teams may be able to close deals on their own, while smaller businesses need help from bankers, said Rajeev Krishnan, president of SBI Capital Markets Ltd.

“A lot of midmarket companies are on the lookout globally, particularly in Europe, and they need our expertise,” Krishnan said. Companies may not be familiar with labor and bankruptcy laws in new jurisdictions and that’s where bankers bring value, he said.

“Reputation is more important for us than making fees on a deal,” Krishnan said.

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