Derailed demerger plan leaves GE Shipping at sea

The stock markets were disappointed at GE Shipping’s proposed demerger of its offshore business falling through. The scrip closed 1.2% down at Rs 221, after falling to a low of Rs 207.

The setback will mean that investors, who were expecting shares of the offshore company, will now have to wait.

Since status quo prevails, the business will operate as usual, and performance will not get affected.

However, shareholders would have benefited more by getting shares of the offshore company, as they would hold shares in a shipping company as well as an offshore firm.

The benefit, as in most demergers, is that both businesses get different multiples. Offshore oil field services companies quote at P/E multiples of 15-40 times whereas shipping companies trade at multiples of 3-5 times.

The offshore division of GE Shipping is about 70% the size of Aban Lloyd, the largest Indian company in that space. While that makes it big, GE’s offshore business is less than 20% of the total turnover, which results in GE Shipping getting valuations similar to a shipping company.

Incidentally, Aban Lloyd’s market capitalisation is about 90% of GE Shipping, which shows the higher valuation accorded to an offshore business at the moment.

A demerger would have enabled shareholders to benefit from the higher valuation of an offshore business. However, GE Shipping has said that it will examine ‘other possibilities’ for restructuring its business to ‘maximise value accretion to shareholders’.

Since a demerger seems to be out for the moment, the company could either continue as a single company as before, which means status quo, as far as valuation is concerned.

Another possibility could be to transfer the entire offshore assets of GE to a subsidiary. This could then be listed independently with GE having the controlling stake.

In this case, the valuation of the offshore division will be independent of the mainstream shipping — the argument given for the original demerger.

In any case, GE Shipping itself is making significant investments in offshore. It had placed orders adding up to $270m for offshore equipment in recent months.
The offshore industry has picked up sharply in the recent months, while shipping is slowing down
from the highs seen in the past couple of years.

Ranbaxy, Pfizer battle may continue Ranbaxy’s aggressive spending in legal expenses for patent challenges was vindicated to an extent. The company won an appeal, invalidating one of Pfizer’s patents on Lipitor, which was due to expire in June ’11. But it lost the case for a patent that will expire in ’10. That will mean a longer wait for the launch, compared to the second one which would have seen it launch by ’07-08.

Ranbaxy can launch its own generic version of Pfizer’s cholesterol-lowering drug and benefit from a 180-day exclusivity period. This would clearly represent a gold mine for the domestic pharma major. With estimated annual sales of $8.5bn or Rs 39,000 crore, Lipitor is the world’s largest selling drug.

During the six-month exclusivity period, if Ranbaxy manages to get even half of this market, even after factoring in 40% price erosion and a 30% profit margin, it will reap a huge windfall of about Rs 1,700 crore.

Lucrative though the opportunity is, it will not materialise in the near to medium term. Moreover, this is not the end of the battle, as Pfizer will try to reverse its loss.

It has said that it believes it lost the case on a technical defect, and will attempt to rectify it at the US patents office. Ranbaxy, too, may decide to appeal at the next level against the decision in the patent expiring in ’10.

So, Ranbaxy’s legal bill will keep mounting, if it decides to appeal in the case it lost, or if Pfizer succeeds in its appeal and pushes Ranbaxy to go in for further litigation. What is critical is that Ranbaxy has a better chance of coming to market with atorvastatin before patent expiry, either in ’10 or, as its investors have been wishing, earlier.

But the cloud of uncertainty, over what will happen at the next appeal process, still hangs heavy over Ranbaxy’s Lipitor patent challenge saga.