"To a large extent, my life has been devoted to Taro," says Taro Pharmaceutical Industries (Pink Sheets: TAROF) chairman Dr. Barrie Levitt, as he prepares for the final battle with Indian pharmaceutical company Sun Pharmaceuticals Ltd. (BSE: 524715) for his holdings in the company. "I started working here when I was in high school, and later I studied medicine and pharmaceutical engineering for the sake of Taro," he tells "Globes" in his first interview ever with the press. "For the last twenty years, I have worked full time at Taro, after I resigned from my position as an advisor to the FDA, and gave up senior positions in research and academe."
Levitt has been on the Taro board since his father died in 1963. His parents, Rachel and Yaakov, invested in the company back in the early 1950s, and in fact were the ones who founded the company as we know it today. Before that, Taro operated as cooperative of new immigrant pharmacists, who formed the venture in Nahariya where they lived.
"My father was a Zionist all his life," says Levitt. "My parents were born in the Ukraine, and lived in Chernobyl. Following the Russian revolution my family had to flee. As Zionist socialists, they were considered opponents of the Communist regime." Levitt relates that after they fled, the family filed two visa applications - one for Palestine, as it was then, and another for the US. "The US visa arrived before the visa for Palestine, and that is the only reason I wasn't born here."
After the founding of the state, Levitt's father moved to Israel. "He had friends here such as Levi Eshkol and Golda Meir, and they all convinced him that the most important contribution he could make was to build a factory," says Levitt. This led to the partnership between the Levitt family and the pharmacists' cooperative in Nahariya. A few years later, in 1954, the family financed the building of the factory which stands on the same site to this day, near the railway tracks in Haifa Bay. "When we moved to the new plant in Haifa, my father made a speech in Hebrew and said, 'I'm sending you dollars wrapped in love,' but it wasn't just a labor of love - my father wanted people to invest in Israel and make money, and wanted Israel to be a profitable place to invest in."
During the last year and a half, Taro has been featured in the press largely in connection with legal issues. The drug company from Haifa, which was once described as the "Little Teva", made headlines following the signing of the merger deal with Indian company Sun, which was not welcomed by the company's minority shareholders, to put it mildly. One of them, US fund manager Franklin Templeton, even dragged the management into the courts in a legal battle to block the merger. Hovering in the background constantly was the fact that the company had stopped publishing financial reports because of problems in the timing of recognition of revenue that have remained unresolved since 2002.
The latest twist in the saga came at the end of May, a year after the signing of the merger agreement. The Taro management announced that it was cancelling the merger, and even advised investors that it had turned down an offer from Sun to raise the deal price by 32% to $10.25 per share from $7.75. Taro's case continues to drag on in the courts, except that now the sides have changed benches. Taro and Sun's lawyers were previously on the same side, as defendants in the action brought by Franklin Templeton, but now they are opponents.
Levitt says the agreement with Sun on the sale of the company his parents founded, was not easy for him. He claims he had no choice. "We were facing a credit stranglehold, we were on the verge of becoming insolvent as we had to repay money we had borrowed - and never before has this company had to declare itself insolvent, we have always met our liabilities," he points out.
After the merger, Levitt was supposed to have retired. "I was willing to go," he recalls. "Sun asked to me stay on, but I was not prepared, mentally, to stay on and work for an Indian company."
Today, with the Taro board having decided to call off the merger agreement, Levitt is falling back on Zionism and Israeli-Jewish nationalism, in the battle to keep Taro in the hands of its current shareholder, his own family and that of his cousin, Dr. Daniel Moros. "We feel that keeping Taro Israeli is in the interest of the country. The fear we have is quite simple; I think that Mr. Shanghvi (the chairman and CEO of Sun, D.S.) has to act in the interests of Sun's shareholders in India, just as I have to act in the interests of Taro's Israeli shareholders here in Israel."
Globes: Not all of Taro's shareholders are Israeli.
Levitt:"Yes, but they invested in an Israeli company. Sun has surplus production capacity in India, and managing its production capacity rationally could lead it to close the plant in Israel."
You said that your father wanted people to invest in Israel because investing here was profitable. Isn't that exactly what Sun is doing, investing in a factory because it's profitable?
"I feel that what is important to Sun is Taro's intellectual capital, our patents, and even more importantly - our reputation and integrity. Words come easy, and they may say they intend to remain in Israel, but we have invested $150 million in the plant in Haifa - those are not words, but actions. With the surplus production Sun has in India, I am worried because of what this could mean for our employees and for the State of Israel."
Levitt thumps the table at this point, and appears for a moment as if he is seeking to invoke a few Jewish persecution complexes in support of his claim. "There are quite a few evil people out there, who would be glad of an opportunity to harm Israel," he says in a half-outraged, half-concerned tone. "Israel needs a strong economy, because no one is going to save us. No Indian army is going to save Israel. The ones who will save Israel are Israeli soldiers, in the Israeli army, who will need jobs when they return home."
Where was this concern a year and a half ago, when you decided to sell Taro to Sun?
"The decision to accept the Sun offer was taken by the board. I went along with it."
Taro's road to the signing of the agreement with Sun was neither easy nor pleasant. It came to the agreement after being delisted from Nasdaq for failing to produce financial reports, and with acute liquidity problems and an inability to repay loans that had fallen due. Asked how Taro found itself in a liquidity stranglehold to begin with, Levitt is quick to point out the investments it made in Israel at the beginning of the decade. "We invested $150 million in plant and machinery in the Haifa factory, and this was probably too aggressive an investment, but anyone who visits the factory can see for himself where the money went."
When the Taro management realized they couldn't pay the company's debts, they engaged an investment bank to look for new investors who would make an immediate liquidity injection. "The bank found three investor groups, all of which were considered by the board. There was also an Israeli offer, at a price lower than that offered by Sun," Levitt reveals. "Sun's offer was the highest - but accordingly, they insisted on acquiring the company in full, and also asked to add an options agreement for the shares owned by my and my cousin's families." The agreement gave Sun an option to purchase all the shares held by the Levitt and Moros families at the same price as offered in the deal - $7.75 per share.
"When the board considered the three offers, all the directors from my family had to absent themselves from the meeting," Levitt stresses, in an attempt to prove he had no special personal interest in the selection of the offer from Sun. "The board chose the Sun offer because it was the highest one for shareholders. I went along with the board's decision." Under the deal, the shares of Taro's founders were priced in the same manner as the company's ordinary shares, even though they gave the Levitt and Moros families more voting rights than those of ordinary shares.
Not long after the signing of the merger agreement with Sun, it emerged that some of Taro's other shareholders were far from happy about it. One institutional investor in the US, Brandes Investment Partners LP, announced it would vote against the merger, and another - US fund manager Franklin Templeton - dragged the company into the courts in attempt to block the deal. "Once the situation reached this point, we tried to convince the other shareholders," Levitt says, recalling how he realized last summer that investors had turned down the savior he had found to help pay the company's debts.
On July 23 last year, in what was a low point in Taro's history, the shareholder's meeting that had been convened to vote on the Sun deal - and was apparently about to reject it - was called off at the last minute. "Globes" disclosed on its website the night before that the management was set to postpone the meeting, but the investors themselves were given less than one hour's notice before the meeting was to due begin.
"The merger actually fell through on July 23 last year," claims Levitt in a surprising version of events. "It was already clear that the investors were going to turn the offer down." Franklin Templeton's lawyers, incidentally repeatedly said the same thing during the legal hearings that followed later that year, and added that they had also asked to receive details of the votes that had been cast by proxy.
"What happened that night was that Sun actually begged us to call off the meeting," says Levitt. "Sun offered Taro discounts, so that we would cancel the meeting at the last minute. They met us halfway with more compromises - they waived the no shop option, they decided to inject a further $18 million into the company's shareholders' equity. They asked us to give them a few weeks to try and persuade Franklin Templeton and Brandes, the institutional investors opposed to the merger, but over the next few months it became clear that the merger was not going to happen. I, personally, was willing to see the agreement through, but my heart was with the shareholders. Later on, Sun talked about raising the deal price, but the board ultimately decided to cancel the agreement."
The original price for the deal, at which Sun is now seeking to buy the shares of Levitt and his family, is substantially lower than Taro's share price on the Pink Sheets in recent months, which reached $10 per share. The options agreement now stands at the center of the dispute now being heard in the Tel Aviv District Court, where Taro and its independent directors are asking that Sun be ordered to make a special purchase offer in order to be able to realize the options agreement. Under Israeli law, a special purchase offer requires the consent of at least half the participants who are not parties-at-interest to sell their shares, which must amount to at least 5% of the company.
Were you aware that if you reached a point where the options agreement could be exercised, there would suddenly be a request for a special purchase offer?
"No one assumed that we would ever find ourselves dealing with the options agreement. We all thought the shareholders were going to approve the merger. But it was the shareholders themselves who went to court to get it stopped."
Sun claims that they were surprised by the request for a special purchase offer. They say they are required by the agreement to make an ordinary purchase offer.
"I presume that Sun did know what their liabilities were under Israeli law as regards a special purchase offer. It is important to understand that I'm not the one who is asking for a special purchase offer, it is required by law. I would never sign an agreement that deprives shareholders of rights to which they are entitled by law."
Levitt says proudly, that in recent months, Taro has shown the first signs of what is shaping up as a significant turnaround. The company's revenue for the first half of 2008 stood at $166.2 million, with net profit totaling $20.6 million, not far off the net profit for 2007 as a whole. Taro's cash flow for the first six months of the year totaled $23 million.
"Obviously, you can ask me how you can be sure I'm not lying, given that Taro still hasn't published any financial reports," Levitt says, aware of the main point his critics will make. “But it is common knowledge that we had to restate the financials because of issues relating to the timing of recognition of revenue in 2002-2006, so all told, the revenue for those years is correct and agreed on, and the only question is how to distribute it over the years. I believe that there will be no skeletons in the cupboard in the restated financials.”
And when will the shareholders know for sure? Levitt has no answer. “I wish I knew how long this process is going to take. I have three accountancy firms in the US working on it, and I hope it will be completed in the near future.
“There are number of companies that are willing to buy Sun’s share in Taro for $10.25 a share and even more,” Levitt says. “Our goal is to finish the restatement of our financials, get the share re-listed on Nasdaq, and then let the market determine the company’s price.”
Does this mean that the end of the saga with Sun lies in an arrangement with a third party? “I hope so,” says Levitt, “but it takes two to tango. Sun has to be willing to sell.” Levitt is also well aware of the obstacles in the way of such an arrangement. “If Sun thinks it can buy the company, or a significant stake in it, for $7.75, or even $10 a share, then it will be difficult to negotiate with them. I like Mr. Shanghvi, but he is unwilling to negotiate.”
The other side of the coin
“I visited the plant in Haifa twice, and on each occasion I returned to India optimistic and excited about the things we could do there,” says Dilip Shanghvi, chairman and CEO of Indian pharmaceutical company Sun, which was to have acquired Taro under the merger agreement last Spring, in a telephone interview with “Globes.” “The plant in Haifa suffers from an unexploited production capacity. We most certainly intend to move production there, and not the reverse.
“If you look at our history as a company, you will see that we always increased our investment in the factories we acquired. Around eight or nine years ago, we acquired a company in the US, and two years ago we acquired another American company, and in both cases there are more people working there today than there were before.”
Contrary to the claim Barrie Levitt has been making openly, Shanghvi insists that Sun did not ask Taro to postpone the shareholder’s meeting that had been scheduled for July 23 last year. “It simply isn’t true. They informed us in advance of their decision to postpone the meeting, but they didn’t explain why. We invested the extra $18 million because they told us the company was likely to run into difficulty, while the merger remained on hold.”
Shanghvi also adds that he never expected that Sun would have to make a special purchase offer in order to exercise the options agreement it signed with the Levitt and Moros families. “Our understanding of Israeli law was that if we buy the stake of a shareholder who holds 45%, then there is no need for a special purchase offer.” Taro is now claiming that the Levitt and Moros families (headed by the cousins, Barrie Levitt, and Daniel Moros), do not constitute a single entity, and that in any event, the share allocation to Sun following the agreement lowered their jointly held stake to less than 45%.
Published by Globes [online], Israel business news - www.globes-online.com - on August 20, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008