---

 

	PAGE
SUMMARY TERM SHEET	1
The Participants	1
The Merger Agreement	2
Position of Caraco’s Independent Committee as to the Fairness of the Merger; Recommendation by Independent Committee; Approval and Adoption of Merger Agreement by Board of Directors and Independent Committee	2
Position of the Sun Filing Persons as to the Fairness of the Merger	4
Opinion of the Independent Committee’s Financial Advisor	4
Purposes and Effects of the Merger	5
Merger Financing	6
Interests of Caraco Directors and Officers in the Merger	6
Material U.S. Federal Income Tax Consequences	7
Quorum; Required Vote	7
Rights of Appraisal	7
Conditions to Consummation of the Merger	7
Termination of the Merger Agreement	8
Change in Recommendation	8
Regulatory Requirements	9
Litigation Challenging the Merger	9
SPECIAL FACTORS	9

 

QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE SPECIAL  MEETING	62
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING  INFORMATION	68
THE SPECIAL MEETING	69
Time and Place of the Special Meeting	69
Matters to be Considered	69
Record Date; Voting Rights	69
Quorum	70
Required Vote	70
Proxies; Revocation	71
Solicitation of Proxies	71
Appraisal Rights	71
THE PARTICIPANTS	72
Caraco Pharmaceutical Laboratories, Ltd.	72
Sun Pharmaceutical Industries Limited	72
Sun Pharma Global, Inc.	72
Sun Laboratories, Inc	73

 

 

In December 2004 and in January 2005, a Sun Pharma affiliate appointed Caraco to act as a manufacturer and distributor of two of its products.  Of these two products, only one was still being marketed when Caraco ceased manufacturing operations at its Michigan facilities following actions taken by the FDA.  For more information, see “Events Leading Up to the Merger Proposal and the Work of the Independent Committee” beginning on page 12.

On August 27, 2009, Caraco received a demand from a minority stockholder to bring suit against the Caraco’s officers and directors arising from the FDA issues.  On September 9, 2009, the Board of Directors met to consider the appointment of Mr. Bell to fill the vacancy to be created as a result of Dr. Crissman’s decision not to stand for re-election and to consider the stockholder demand letter.  Caraco’s outside corporate legal counsel explained to the Board of Directors the process and impact under Michigan law of having a disinterested independent director investigate and make a determination regarding whether a derivative proceeding should proceed.  Counsel noted that none of the existing directors met the Michigan standard of “independent” or “disinterested” director, but that Mr. Bell, whose resumé had been submitted to the Board of Directors for consideration as a director, was disinterested, and could be found to be independent by the Board of Directors as having met the statutory qualifications necessary to be independent, assuming his election by a vote of stockholders.  The Board of Directors appointed Mr. Bell as a director effective following the September 14, 2009 annual meeting of stockholders.  Contemplating that Mr. Bell would be elected at a special meeting of stockholders and would thereafter conduct an independent investigation related to Caraco’s FDA issues, the Board of Directors resolved to terminate the Special Committee.  Messrs. Ugeux, Dr. Crissman and Mr. Manney voted against termination of the Special Committee.  Messrs. Ugeux, Dr. Crissman and Mr. Manney voted against termination of the Special Committee because they believed that the work that they had done to date gave them a basis for continuing their own investigation of Caraco's FDA issues regardless of Mr. Bell’s investigation in connection with the August 27, 2009 demand letter.

/s/ Dilip S. Shanghvi	/s/ Harin Mehta
Dilip S. Shanghvi	Harin Mehta
Chairman and Managing Director	Director
Sun Pharmaceutical Industries Limited,	Sun Pharma Global, Inc.
17/B Mahal Industrial Estate,	International Trust Building,
Mahakali Caves Road,	P.O. Box 659,  Tortola
Andheri (E), Mumbai-400093 India	British Virgin Islands

On December 9, 2010, a putative class action lawsuit was filed on behalf of Caraco’s stockholders entitled Groen v. Caraco, et al., Case No. 10-014311-CB in Wayne County Circuit Court, alleging that defendants had breached their fiduciary duties with regard to the Sun Proposal and sought, among other things, to enjoin the prospective consummation of the Sun Proposal.  At least seven other similar actions were subsequently filed in Wayne County Circuit Court.  (See “Litigation Challenging the Merger,” page 55.)

On January 22, 2011, the Independent Committee and Carrington Coleman met to discuss the upcoming negotiations between the Independent Committee and Mr. Shanghvi, and to discuss recent developments at Caraco affecting management’s financial forecasts.  The Independent Committee reviewed the most recent preliminary forecasts by the Caraco Team, including the underlying assumptions, and William Blair’s analysis of those forecasts.  The Independent Committee noted that these forecasts contained assumptions about Caraco’s financial performance in its current fiscal year and about certain drugs, which assumptions needed to be changed because of recently acquired information.  Actual financial results for the third quarter reflected a larger loss than was anticipated in the forecast and results for the fourth quarter were likely to reflect a larger loss than had been assumed in the forecast.  Also, revenues projected for one particular drug needed adjustment to reflect a significant price decrease in the product.   The Caraco Team provided an updated forecast to the Independent Committee and William Blair on February 1, 2011 that reflected this information.

On January 26, 2011, the Independent Committee met with Mr. Shanghvi in London, UK, to negotiate Sun’s Proposal.  The Independent Committee described to Mr. Shanghvi the fiduciary duties to be discharged by the Independent Committee in connection with the Sun Proposal and explained the work that it had undergone—reviewing its duties, working with William Blair and the Caraco Team, the Independent Committee’s reviewing Caraco management’s five-year financial forecast and the various assumptions upon which the financial forecasts were based, assessing the value of its products and pending ANDA approvals, considering alternatives to the Sun Proposal, looking at comparable transactions and historical premiums, and discussing unaffiliated stockholder expectations.  Mr. Munson, a member of the Independent Committee, told Mr. Shanghvi that he believed a higher price than the $4.75 offered was appropriate.  Mr. Shanghvi stated that he believed the valuations of the pending ANDA approvals were less than those presented by the Independent Committee and that the $4.75 price was fair.  After further discussion, Mr. Shanghvi stated that he had approval from Sun Pharma’s board of directors to increase the proposed price only to $5.00 per share, but Mr. Shanghvi said he would recommend to Sun Pharma’s board of directors that they approve a price of $5.25 per share.  The Independent Committee then caucused without Mr. Shanghvi, and after reviewing Mr. Shanghvi’s proposed price and discussing its merits, the Independent Committee responded to Mr. Shanghvi that it could support a price of $5.25 per share subject to receipt of a fairness opinion from William Blair and approval of appropriate legal agreements.  The Independent Committee believed that it could support a price of $5.25 per share based, among other things, on its assessment of the value of Caraco’s products and pending ANDA approvals, assessment of Caraco’s FDA compliance and remediation issues and their negative impact on Caraco and its value, consideration of the expiration of Caraco’s marketing and distribution agreements with Sun Pharma in January 2012, consideration of the relative merits of alternatives to the Sun Proposal, consideration of Sun Pharma and Sun Global’s ownership of approximately 75.8% of Caraco’s outstanding shares, review of comparable transactions and historical premiums with William Blair, assessment of Caraco’s five-year financial forecast and the various assumptions upon which the financial forecast was based, and previous communications with William Blair regarding fairness.  The Independent Committee and Mr. Shanghvi discussed possible transaction structures, including a two-step merger (a tender offer followed by a short-form merger) and a one-step or “long form” merger.

At the Independent Committee’s February 21, 2011 meeting, William Blair, in presenting its fairness opinion, reviewed the materials it had examined, including Caraco’s financial statements and forecasts, Caraco’s filings, comparable market information, the proposed merger agreement and other data.  William Blair also reviewed its valuation analyses, including market metrics of selected public companies, valuations in selected mergers and acquisitions transactions, comparable premiums in similar going private transactions, and valuation of Caraco utilizing discounted cash flows.  The Independent Committee relied on the fairness opinion presented by William Blair as one factor in determining whether the merger consideration to be paid to unaffiliated stockholders was fair, and for purposes of that determination, adopted William Blair’s fairness opinion and the discussions and analysis underlying such opinion as its own.

In responding to questions raised at the meeting, William Blair noted that the EBITDA exit multiples and the discount rates used in its discounted cash flow analysis were higher than those previously used.  In particular, William Blair noted that: (i) in estimating the terminal value of Caraco in its analysis, the range of EBITDA multiples utilized was consistent with those of the selected public general pharmaceutical companies rather than pharmaceutical distributors (11.0x to 13.0x versus 9.0x to 10.0x); and (ii) the discount rates were consistent with the cost of capital rates for early stage pharmaceutical companies (15.0% to 19.0% versus 11.0% to 15.0%).  William Blair concluded that the Caraco business model going forward more closely resembles that of a generic pharmaceutical company rather than that of a pharmaceutical distributor because net sales of products under the marketing and distribution agreements accounted for $211.4 million or 90% of Caraco’s net sales for the fiscal year ended March 31, 2010 and those agreements are expiring on January 28, 2012, and there is no expressed intention by Caraco to enter into other material distribution relationships in the future.  Further, in developing a range of appropriate discount rates, William Blair assessed the weighted average cost of capital of selected public companies deemed relevant to Caraco.  Additionally William Blair considered: (i) the cessation of Caraco’s manufacturing operations and the Consent Decree, (ii) the substantial uncertainty regarding the timing of the resumption of manufacturing operations; (iii) Caraco management’s projections that Caraco will be unable to generate an operating profit until fiscal year 2016; (iv) several of the products in Caraco’s pipeline represent new products not currently manufactured by Caraco; and (v) the size of Caraco.  The Independent Committee concurred with the multiples and rates included in William Blair's presentation.  The Independent Committee also noted that using the lower multiples and discount rates would result in an implied present value of $3.84 to $5.06 per share rather than the $4.23 to $5.37 range implied by the discounted cash flow analysis used by William Blair in rendering its fairness opinion. William Blair also noted that the discounted cash flow analysis represented only one aspect of its valuation analysis contained in the William Blair Opinion.

On February 21, 2011, the Independent Committee met and approved and adopted the merger agreement and the related transactions.  The Independent Committee also determined that the proposed merger and the related transactions were substantively and procedurally fair to and in the best interests of Caraco’s unaffiliated stockholders. Based on such determination, the Independent Committee is recommending that Caraco’s unaffiliated stockholders vote FOR the approval and adoption of the merger agreement.  In addition, the Independent Committee recommended to the Board of Directors that the Board of Directors approve and adopt the merger agreement and the related transactions.

Business and Financial Information.   The Independent Committee took into account the historical and current financial condition of Caraco and results of its operations, which reflected decreasing revenues and increasing operating losses.  The Independent Committee also took into account the business and prospects of Caraco, which involve significant risks related to Caraco’s ability to successfully remediate its FDA compliance issues as discussed further below and the expiration of the Sun Pharma marketing and distribution agreements also discussed further below.  The Independent Committee concluded that these factors supported its fairness determination because they suggested that Caraco faced significant negative risks to its ability to realize successful future growth and profitability.   

Period		Net Sales				Gross Profit
Nine months ended Dec. 2010		$	251,500,076			$	23,463,115
Fiscal Year 2010		$	211,358,549			$	19,716,017
Fiscal Year 2009		$	225,423,273			$	19,662,047

Financial Analysis and Opinion of William Blair.  The Independent Committee considered its discussions with William Blair and the William Blair Opinion delivered on February 21, 2011, to the effect that, as of such date, and based upon and subject to the assumptions made, matters considered and limitations on the review undertaken described in the William Blair Opinion, the merger consideration to be paid is fair, from a financial point of view, to the stockholders of Caraco, other than the Sun Pharma and Sun Global.  The reference in the William Blair Opinion to "the stockholders of Caraco, other than Sun Pharma and Sun Global," includes all unaffiliated stockholders. The full text of the William Blair Opinion is included as Appendix B hereto, and William Blair’s presentation relating to such opinion is summarized under “Opinion of the Independent Committee’s Financial Advisor,” page 32.  The Independent Committee was aware of the fees that William Blair is entitled to receive as described under “Estimated Fees and Expenses,” on page 54, which the Independent Committee believed were designed to provide appropriate incentives for William Blair.  The Independent Committee relied on the fairness opinion presented by William Blair as one factor in determining whether the merger consideration to be paid to unaffiliated stockholders was fair, and for purposes of that determination, adopted William Blair's fairness opinion and the discussions and analysis underlying such opinion as its own.

·

The Independent Committee, which is comprised of three directors who are not affiliated with Sun Pharma or Sun Global and are not officers or employees of Caraco, unanimously concluded that the merger is fair to and in the best interests of the unaffiliated stockholders of Caraco, approved and adopted the merger agreement and the merger, recommended that the unaffiliated stockholders of Caraco vote to approve and adopt and approve the merger agreement and recommended to the Board of Directors that the Board of Directors approve and adopt the merger agreement;

·

The Independent Committee was advised by its independent legal counsel and financial advisor in relation to the merger;

·

The Independent Committee had the authority to reject any transaction proposed by Sun Pharma or Sun Global and did not have the obligation to recommend that Caraco’s unaffiliated stockholders approve and adopt the merger agreement;

·

The Independent Committee received an opinion from the Independent Committee’s independent financial advisor, William Blair, to the effect that, as of the date of the William Blair Opinion and subject to the various assumptions, qualifications and limitations set forth in its opinion, the merger consideration is fair to Caraco’s unaffiliated stockholders from a financial point of view. The full text of the William Blair Opinion which sets forth, among other things, the assumptions made, procedures followed, matters considered and qualifications and limitations of the reviews undertaken by William Blair in rendering its opinion, is attached as Appendix B to this proxy statement and is incorporated herein by reference. You are urged to, and should, read the William Blair Opinion carefully and in its entirety. The opinion was directed to the Independent Committee and addresses only the fairness, from a financial point of view, of the merger consideration to be received by Caraco’s unaffiliated stockholders. The opinion does not address any other aspect of the proposed merger nor does it constitute a recommendation to any stockholder as to how such stockholder should vote or act with respect to any matters relating to the merger agreement;

·

The consideration to be paid to Caraco’s unaffiliated stockholders under the merger represents:

o

a 15.6% premium over the closing price of Caraco Common Stock on the NYSE Amex on December 3, 2010, the last trading day prior to announcement of Sun Pharma’s and Sun Global’s $4.75 per share proposal, and a 10.5% increase over the $4.75 per share proposal; and

o

a 13.9% premium to the average closing price of Caraco Common Stock on the NYSE Amex for the 30 trading days ended on December 3, 2010;

·

The fact that no alternative bidder would be able to consummate an acquisition of Caraco because Sun Pharma and Sun Global each is unwilling to sell its shares of Caraco Common Stock (which shares represent a controlling interest);

·

The consideration to be paid in the merger is all cash and is not subject to any financing condition, which provides certainty of value for Caraco’s unaffiliated stockholders;

·

The consideration to be paid in the merger reflects the fact that Sun Pharma and Sun Global already own a majority of the outstanding shares of Common Stock and, accordingly, the merger does not involve a change of control.  As a result, the merger should not be expected to, and does not, reflect a control premium;

·

Caraco’s unaffiliated stockholders who do not vote in favor of the merger agreement and who comply with certain procedural requirements will be entitled, upon completion of the merger, to exercise statutory appraisal rights under Michigan law, which allows those stockholders to have the fair value of their shares determined by a Michigan court and paid to them in cash.  This entitlement is not automatic under Michigan law and is the result of negotiation by the Independent Committee on behalf of Caraco’s unaffiliated stockholders;

·

The merger will provide liquidity, without the brokerage and other costs typically associated with market sales, for Caraco’s unaffiliated stockholders whose ability to sell their shares of Common Stock is adversely affected by the limited trading volume and low public float of the shares;

·

The belief that the going concern value of Caraco as a public company could be less than the merger consideration of $5.25 per share.  This belief is based upon the substantial challenges and uncertainty created by the FDA’s recent seizure and enforcement actions involving Caraco (and the underlying issues giving rise to those actions) and the related cessation of Caraco’s manufacturing operations, which have resulted in substantial operating losses at Caraco.  There is no assurance that Caraco will be able to successfully resolve its FDA compliance issues, resume its previous level of manufacturing activities or return to profitability;

·

The expiration of the Sun Pharma-Caraco marketing and distribution agreements in January 2012; and

·

The other factors referred to above as having been taken into account by the Independent Committee, which the Sun Filing Persons adopt as their own (see “Position of Caraco’s Independent Committee as to the Fairness of the Merger; Recommendation by Independent Committee; Approval and Adoption of the Merger Agreement by Board of Directors and Independent Committee” beginning on page 22).

·

The Independent Committee and its counsel negotiated all financial and other terms and conditions of the merger agreement on an arm’s–length basis with Sun Pharma, Sun Global and their counsel, with the Independent Committee benefiting from the advice of William Blair.  Sun Pharma and Sun Global did not participate in the deliberations of the Independent Committee or the Board of Directors;

·

The Independent Committee unanimously concluded that the merger is fair to and in the best interests of the unaffiliated stockholders of Caraco, approved and adopted the merger agreement and the merger, recommended that the unaffiliated stockholders of Caraco vote to approve and adopt the merger agreement and recommended to the Board of Directors that the Board of Directors approve and adopt the merger agreement and the merger;

·

The merger consideration and other terms and conditions of the merger agreement were the result of arm’s–length negotiations between Sun Pharma and Sun Global, on the one hand, and the Independent Committee on the other hand, and their respective advisors;

·

The Independent Committee had the authority to reject the transaction proposed by Sun Pharma and Sun Global, and did not have the obligation to recommend that Caraco’s unaffiliated stockholders approve and adopt the merger agreement;

·

Under the terms of the merger agreement, in certain circumstances prior to obtaining stockholder approval and adoption of the merger agreement, the Independent Committee is permitted to withdraw or modify its recommendation of the merger agreement; and

·

Caraco’s unaffiliated stockholders who do not vote in favor of the merger agreement and who comply with certain procedural requirements will be entitled, upon completion of the merger, to exercise statutory appraisal rights under Michigan law, which allows those stockholders to have the fair value of their shares determined by a Michigan court and paid to them in cash.  This entitlement is not automatic under Michigan law and is the result of negotiation by the Independent Committee on behalf of Caraco’s unaffiliated stockholders.

The Sun Filing Persons believe that the merger consideration is fair in relation to Caraco’s going concern value per share based on their knowledge of Caraco’s business and prospects, including the current challenges and uncertainties of Caraco’s operating environment (including as a result of the FDA’s recent seizure and enforcement actions), the projections contained in this proxy statement (including the assumptions contained therein), Caraco’s historical results of operations, and the Sun Filing Persons’ knowledge of Caraco’s industry.  The Sun Filing Persons did not calculate a specific per share going concern value for Caraco because of the substantial uncertainty concerning Caraco’s value as a result of Caraco’s FDA compliance issues, because the merger consideration represents a premium to the market price of shares of Common Stock prior to the announcement of the Sun Proposal and because of their extensive knowledge of Caraco’s business, prospects and industry.

 

·

a draft of the merger agreement dated February 18, 2011;

·

audited historical financial statements of Caraco for the years ended March 31, 2008 through March 31, 2010;

·

unaudited financial information of Caraco for the nine month periods ended December 31, 2009 and December 31, 2010;

·

certain internal business, operating and financial information and forecasts of Caraco for the Fiscal Years ending March 31, 2011 through 2016 prepared by the senior management of Caraco (the “Forecasts”);

·

certain publicly available business, financial and other information relating to Caraco that William Blair deemed to be relevant;

·

current and historical market prices and trading volumes of Caraco’s shares;

·

the financial position and operating results of Caraco compared with those of certain other publicly traded companies William Blair deemed relevant; and

·

information regarding publicly available financial terms of certain other business combinations William Blair deemed relevant.

The following is a summary of the material financial analyses performed and material factors considered by William Blair to arrive at its opinion and presented by William Blair to the Independent Committee on February 21, 2011 in connection with William Blair’s delivery of its opinion.  A copy of William Blair’s February 21, 2011 presentation to the Independent Committee has been included as Exhibit (c)(2)(iii) to the Schedule 13E-3 filed with the SEC by Caraco, Sun Pharma, Sun Global, Merger Sub and Mr. Shanghvi in connection with the merger, and the following summary is qualified by reference to this exhibit..  William Blair performed certain procedures, including each of the financial analyses described below, and reviewed with the Independent Committee the assumptions upon which such analyses were based, as well as other factors.  Although the summary does not purport to describe all of the analyses performed or factors considered by William Blair in this regard, it does set forth those considered by William Blair to be material in arriving at its opinion.

·

AmerisourceBergen Corporation

·

Cardinal Health, Inc.

·

McKesson Corporation

·

Dr. Reddy's Laboratories Ltd

·

Lupin Ltd.

·

Mylan, Inc.

·

Par Pharmaceutical Companies Inc.

·

Ranbaxy Laboratories Ltd.

·

Teva Pharmaceutical Industries Limited

·

Watson Pharmaceuticals Inc.

 

		Selected Public Company Valuation Multiples																Caraco at $5.25 per
Pharmaceutical Distribution Companies		Median				Mean				Min				Max				share
Enterprise Value/LTM Revenue			0.16	x			0.17	x			0.13	x			0.20	x			0.49x	(1)
Enterprise Value/2010E Revenue (2)			0.16	x			0.17	x			0.13	x			0.20	x			0.52x	(3)
Enterprise Value/2011P Revenue (2)			0.15	x			0.16	x			0.13	x			0.19	x			0.60x	(3)
Enterprise Value/LTM EBITDA			9.3	x			9.3	x			8.9	x			9.6	x		NMF		(4)
Enterprise Value/2010E EBITDA (2)			9.3	x			9.3	x			8.9	x			9.6	x		NMF		(4)
Enterprise Value/2011P EBITDA (2)			8.3	x			8.0	x			7.4	x			8.3	x		NMF		(4)
Generic Pharmaceutical Companies
Enterprise Value/LTM Revenue			2.82	x			2.71	x			1.04	x			3.79	x			0.49x	(1)
Enterprise Value/2010E Revenue (2)			2.82	x			2.74	x			1.13	x			3.79	x			0.52x	(3)
Enterprise Value/2011P Revenue (2)			2.50	x			2.45	x			1.30	x			3.24	x			0.60x	(3)
Enterprise Value/LTM EBITDA			12.5	x			12.1	x			7.0	x			16.7	x		NMF		(4)
Enterprise Value/2010E EBITDA (2)			10.2	x			11.8	x			6.0	x			16.7	x		NMF		(4)
Enterprise Value/2011P EBITDA (2)			8.8	x			10.7	x			5.3	x			16.1	x		NMF		(4)

(1)

LTM for Caraco as of December 31, 2010.

(2)

Reflects full calendar year Wall Street analysts’ consensus estimates for selected companies.

(3)

Caraco estimates for 2010E reflect the Fiscal Year ending March 31, 2011. Caraco estimates for 2011P reflect the Fiscal Year ending March 31, 2012.

(4)

Caraco EBITDA is negative in all periods presented above.

·

Kinray, Inc. / Cardinal Health.

·

Bellco Health / AmerisourceBergen Corporation.

·

Activus Healthcare Solutions, Inc. / PSS World Medical, Inc.

·

Asenda Pharmaceutical Supplied Ltd. / AmerisourceBergen Canada Corporation.

·

Priority Healthcare Group / Express Scripts Inc.

·

Trent Drugs (Wholesale) Ltd. / AmerisourceBergen Corporation.

·

D&K Healthcare Resources, Inc. / McKesson Corporation.

·

Paddock Laboratories / Perrigo Company.

·

Arrow Group Ltd. / Watson Pharmaceuticals, Inc.

·

Alpharma Inc. / King Pharmaceuticals.

·

Barr Pharmaceuticals / Teva Pharmaceutical Industries, Ltd.

·

Bentley Pharmaceuticals, Inc. / Teva Pharmaceutical Industries, Ltd.

·

Merck Generic Holdings / Mylan, Inc.

·

Actavis Group hf. / Novator.

·

Andrx Corporation / Watson Pharmaceuticals, Inc.

·

IVAX Corporation / Teva Pharmaceutical Industries, Ltd.

 

 

Selected M&A Transaction Valuation Multiples

Caraco at $5.25 per

Pharmaceutical Distribution Companies

Median

Mean

Min

Max

share

Enterprise Value/LTM Revenue

0.16

x

0.31

x

0.08

x

0.72

x

0.49x

(1)

Enterprise Value/LTM EBITDA (2)

15.7

x

15.7

x

15.3

x

16.1

x

NMF

(2)

Generic Pharmaceutical Companies

Enterprise Value/LTM Revenue

2.75

x

2.79

x

1.51

x

4.25

x

0.49x

(1)

Enterprise Value/LTM EBITDA (2)

16.0

x

16.0

x

9.6

x

26.4

x

NMF

(2)

(1)

LTM for Caraco as of December 31, 2010.

(2)

Caraco LTM EBITDA is negative.

Premiums Paid Analysis. William Blair analyzed domestic public transactions announced since January 1, 2005 with transaction values greater than $10 million in which 1.0% to 49.9% of the target’s equity was acquired with the acquirer owning greater than 50% but less than 99% of the target prior to the transaction.  Upon completion of the transaction the acquirer owned 100% of the target.  There were 66 such transactions.  Some of the names of the participants in these transactions were provided by William Blair to the Independent Committee.  William Blair compared the price of each transaction to the closing price of the target stock one day, one week, one month, 60 days, 90 days and 180 days prior to the announcement of the transaction.  William Blair then compared the range of resulting per share price premiums for the selected transactions to the premiums implied by the merger based on Caraco’s closing share prices one day, one week, one month, 60 days, 90 days and 180 days prior to December 3, 2010, the date Caraco received Sun Pharma’s initial merger proposal.  Information regarding the premiums calculated from William Blair’s analysis of selected transactions is set forth in the following table:

 

						Premium Paid Data Percentile
Premium to Closing Price Before Announcement Measured as of		Caraco at $5.25 per share				10th				20th				30th				40th				50th				60th				70th				80th				90th
One Day			15.6	%			(2.9	%)			6.5	%			11.0	%			16.9	%			24.0	%			29.1	%			33.3	%			41.4	%			56.8	%
One Week			12.4	%			(4.8	%)			6.3	%			10.5	%			15.5	%			22.6	%			28.7	%			35.2	%			44.4	%			56.7	%
One Month			13.9	%			(2.4	%)			5.5	%			11.6	%			16.6	%			21.5	%			27.1	%			38.0	%			45.7	%			57.0	%
60 Days			(9.8	%)			(15.5	%)			5.4	%			10.5	%			14.7	%			18.1	%			22.8	%			37.6	%			47.5	%			67.2	%
90 Days			3.6	%			(17.5	%)			0.0	%			0.0	%			7.7	%			18.4	%			24.8	%			35.8	%			46.4	%			63.2	%
180 Days			21.2	%			(20.7	%)			0.8	%			9.8	%			19.4	%			29.8	%			36.0	%			52.1	%			67.4	%			99.5	%

 

 

						Premium Paid Data Percentile
Premium to Closing Price Before Announcement Measured as of		Caraco at $5.25 per share				10th				20th				30th				40th				50th				60th				70th				80th				90th
One Day			15.6	%			(20.0	%)			6.7	%			12.1	%			17.7	%			24.0	%			26.3	%			30.9	%			37.8	%			53.6	%
One Week			12.4	%			(20.0	%)			8.2	%			15.0	%			19.5	%			24.0	%			28.6	%			30.4	%			40.8	%			52.7	%
One Month			13.9	%			(23.7	%)			0.4	%			7.9	%			12.5	%			17.5	%			24.2	%			35.7	%			45.7	%			57.0	%
60 Days			(9.8	%)			(23.8	%)			0.7	%			5.7	%			9.3	%			13.3	%			17.6	%			36.6	%			44.9	%			65.1	%
90 Days			3.6	%			(28.8	%)			(3.2	%)			0.0	%			0.0	%			12.3	%			24.5	%			29.8	%			39.3	%			75.7	%
180 Days			21.2	%			(12.1	%)			0.2	%			8.0	%			14.8	%			20.4	%			31.8	%			53.0	%			69.3	%			105.5	%

Discounted Cash Flow Analysis.  William Blair utilized the Forecasts to perform a discounted cash flow analysis of Caraco’s projected future cash flows for the period commencing January 31, 2011 and ending March 31, 2016.  William Blair defined free cash flows as tax-adjusted operating cash flow less capital expenditures and changes in working capital.  William Blair calculated the assumed terminal value of the enterprise at March 31, 2016 by multiplying projected EBITDA in the Fiscal Year ending March 31, 2016 by multiples ranging from 11.0x to 13.0x.  William Blair noted that the EBITDA multiple range was based on the range of the multiples from the selected public company trading analysis and selected transaction analysis shown above.  To discount the projected free cash flows and assumed terminal value to present value, William Blair used discount rates ranging from 15.0% to 19.0%.  In developing a range of appropriate discount rates, William Blair assessed the weighted average cost of capital of selected public companies deemed relevant to Caraco based on similar fundamental characteristics and business cycles, including products, suppliers, customers and end markets. Additionally William Blair considered: (i) the cessation of Caraco’s manufacturing operations and the Consent Decree, (ii) the substantial uncertainty regarding the timing of the resumption of manufacturing operations; (ii) Caraco management’s projections that Caraco will be unable to generate an operating profit until fiscal year 2016; (iv) several of the products in Caraco’s pipeline represent new products not currently manufactured by Caraco; and (v) the size of Caraco.  To determine the range of fully diluted implied equity value per share for Caraco implied by this discounted cash flow analysis, William Blair added to the derived present values Caraco’s net cash as of December 31, 2010 to arrive at an implied equity value and then divided that amount by the total fully diluted shares outstanding as of December 31, 2010.  The fully-diluted equity value implied by the discounted cash flow analysis ranged from $4.23 per share to $5.37 per share, as compared to the consideration of $5.25 per share to be received pursuant to the merger agreement.