MUMBAI: Shares in Sun Pharma surged by up to eight percent Wednesday on its $3.2-billion deal to buy rival generics giant Ranbaxy from Japan's Daiichi Sankyo, as analysts upgraded the Indian company's stock.
Sun's purchase of Ranbaxy, which it expects to complete by the end of the year, would create the fifth-biggest drugmaker worldwide by sales and vault the company to number one in the fragmented Indian market.
Shares of Mumbai-based Sun closed up nearly seven percent at 627.80 rupees, retracing slightly from an intraday peak of 634.80, while Ranbaxy climbed nearly five percent to 467.0 rupees.
Under the agreement, Sun will give Ranbaxy shareholders four of its shares for every five shares held in Ranbaxy.
Sun's climb came after brokerages upgraded its shares and said the takeover was a good agreement despite Ranbaxy's major safety regulatory problems in its key US market.
"We see significant room for cost synergies in this deal," said investment bank UBS, which upgraded Sun's stock to "buy" from "neutral".
Bank of America Merrill Lynch also moved Sun up to "buy", noting the company has a track record of turning around distressed assets.
Investment firm CLSA said the companies' merger spelt better growth potential than if they had continued as standalone operations.
Brokerages said they were confident Sun would be able to resolve Ranbaxy's plant safety lapses that have prompted US Food and Drug Administration bans on its Indian exports to the United States.
Sun, steered by billionaire Dilip Shanghvi who founded the company in 1983, is currently India's third largest drugmaker.
Sun's shares on Wednesday far outperformed the Bombay Stock Exchange's benchmark index which finished up 1.61 percent.
Financial markets were closed Tuesday for a public holiday.
Leading Indian ratings agency Crisil said Ranbaxy's strong presence in emerging markets such as Russia and Brazil would result in a "higher geographically diversified revenue" for the combined company.
The takeover will give Sun operations in 65 countries and access to Ranbaxy's rich generics drug pipeline.
"The deal makes sense given limited overlap for Sun Pharma and Ranbaxy in India and Sun's limited presence in the ROW (rest of world) markets," UBS said in a report.
The deal brings down the curtain on Daichi's costly ownership of Ranbaxy, which it bought for $4.6 billion in 2008. It took a $3.8 billion writedown a year later over the Indian firm's regulatory woes.
While control of Ranbaxy now goes to Sun, Daiichi will retain a nine percent stake in the merged entity and maintain its presence in the fast-growing global generics market.
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