DRL has signed a definitive agreement with the four promoters of ARL (including ex-Glaxo official Ramaswamy Iyer) to purchase a 45 per cent stake at Rs 175 per share.

The deal, structured by DSP Merrill Lynch, envisages that DRL will buy a further stake of 15-20 per cent (which is almost completed) from the associates of ARL's promoters and make a public offer to purchase an additional 20 per cent stake under the Sebi takeover code.

The open-offer announcement is slated for around Wednesday next and the entire deal (assuming a full response to the offer) will see DRL shell out approximately Rs 80 crore towards the buyout. Top DRL officials indicated that ARL will be merged with DRL and then positioned as a separate unit. The DRL scrip closed lower at Rs 1,181 on the BSE on Friday while ARL moved up to end at Rs 160.65. The ARL counter has been witnessing frenzied trading activity backed by rumours of an imminent equity alliance in the recent past.

The acquisition will catapult the combine's ranking to number five (as per ORG data) with a market share of 2.44 per cent. DRL's issued, subscribed and paid-up capital stands at Rs 15 crore as on March 31, 1999.

DRL chairman Anji Reddy in a statement said, "The American Remedies acquisition is an excellent value creation opportunity for DRL given their strong marketing thrust and innovative product portfolio. The company has strong systems and a top-class field force. We will be able to reap significant synergy gains by co-promoting their neutraceuticals with our mainline products. For instance, ARL's Antoxid brand which is the market leader in its category will be an excellent supplement to our own leading position in cardio therapy."

DSP Merrill Lynch mergers & acquisition head Rajiv Gupta said, "The strategic takeover of ARL by DRL is the largest and most significant pharmaceutical deal in 1999.

This deal, and the acquisition of Dolphin brands last year will help DRL emerge as one of the leading formulations company in the Indian pharma industry."

ARL brings with it key brands like Mucolite, Antoxid, BioE, Becozinc and Optisulin (which account for 60 per cent of total sales) and two facilities-one at Chennai and another at Pondicherry (both approved by Australia's TGA). ARL has earlier sold its bulk drugs unit at Alathur, near Chennai, to the Sanmar Group.

The only worrying factor, according to an analyst with a foreign brokerage firm, is the 800-and-odd ARL employees that come along with the deal. DRL has 2,270 employees on its rolls. Indications are that the key ARL employee structure will not be disturbed, a fact reiterated by Reddy's statement which adds, "DRL will keep alive and promote the unique character and culture of the company and will work closely with the existing promoters to achieve this objective".

ARL managing director, in his statement, said that the "tie-up" is an unique opportunity for ARL to respond to the challenges in the new market place. "While we are well recognised for our marketing strengths, access to new products will help our sales force leverage their strong relationships with a specialist prescriber base. DRL's research pipeline will add to our portfolio and our people will feel most comfortable with the shared organisational culture and practices," he said.

INSIGHT

High aquisition cost
By acquiring a controlling stake in ARL, Dr Reddy's will strenghten its presence in the domestic market and with a merger with group company Cheminor Drugs in the offing, it is expected to gain major access to the international market.However, on the other hand Dr Reddy's has acquired a company which is not in the best of financial health. Around 56 per cent of American Remedies operating profit is eaten away by interest, thanks to a 1.67:1 debt:equity ratio. Further, the company comes with a huge labour force of 800, costing around Rs 8.25 crore towards wage bill (around 10 per cent of the expenditure). Given these figures and the fact that the acquisition price is close to the all-time high price, would not brand acquisitions have made more sense?

--Shishir Asthana