China's Shanghai Fosun Pharmaceuticals (Group) Co. Ltd will acquire a majority stake in Hyderabad-based Gland Pharma Ltd for up to $1.26 billion (Rs 8,440 crore), the Indian company’s private equity investor KKR & Co. LP said on Thursday.
Fosun had been in the race to ink this deal—the largest inbound M&A deal in the country in two years—since May. It had earlier made a non-binding offer to acquire a 96% stake in Gland Pharma but had not disclosed the deal value. It had said that if its bid succeeded, it would enhance its drug manufacturing, research and development capacity.
In the final deal, Fosun is acquiring about 86% of Gland Pharma by purchasing all shares owned by KKR, its affiliates and other shareholders of the company, the global investment firm said. The Vetter family, the promoter of Germany-based Vetter Pharma, is also an investor in privately held Gland Pharma and will exit in this deal.
Gland Pharma, which was founded by PVN Raju in 1978, develops and makes generic injectables primarily for the US market as well as for India and some semi-regulated markets. In 2003, Gland Pharma became the first company in India to get the US Food and Drug Administration’s approval for pharmaceutical liquid injectable products.
Raju and his son, Ravi Penmetsa, will continue to be on the board, and Penmetsa will continue as managing director and CEO, the statement added. The family will retain a stake in Gland.
Penmetsa said the transaction demonstrates the strong expertise of the company and the potential for Indian companies to improve health care worldwide. “We look forward to continuing our work to research, develop and provide medical products from India and continue to add capacity at our facilities."
Fosun Pharma chairman Chen Qiyu said the deal will “greatly strengthen the company’s global presence and accelerate our speed of internationalizationâ€.
Fosun Pharma, a leading researcher, developer, producer and retailer of biopharmaceutical products worldwide, is part of Fosun Group. The group, which was founded in 1992, has operations in the pharmaceuticals, property development, steel, mining, retail and financial services sectors.
The deal values Gland Pharma at $1.46 billion and marks the largest takeover in India by a Chinese company. It would be interesting to see how soon the transaction closes as investments from China are considered sensitive and go through additional scrutiny by Indian authorities.
While some firms like Foxconn, Didi Kuaidi, Alibaba and its payments firm Ant Financial have invested in Indian firms, much of that was seen as venture-style financial investments. Given that this is the first significant acquisition proposal by a Chinese firm, it may go through an intense scanner.
The deal comes barely a month after the government eased foreign direct investment norms for several sectors. In pharmaceuticals, the government decided to permit up to 74% FDI under the automatic route in brownfield pharmaceuticals companies. Beyond 74% government approval will continue to be mandatory.
Since this deal is beyond the threshold, it would need to pass through the Foreign Investment Promotion Board, the nodal body monitoring foreign investment in the country.
The other billion-dollar inbound deals in the pharmaceuticals sector in the past include Mylan acquiring Agila from Strides Acrolab (now Strides Shasun); Abbott buying the domestic formulations business of Piramal and Daiichi Sankyo purchasing a majority stake in Ranbaxy. Daiichi exited India last year after Sun Pharmaceutical Industries Ltd acquired Ranbaxy.
Simpson Thacher & Bartlett and Cyril Amarchand Mangaldas provided legal advice to KKR and Gland Pharma. Jefferies acted as exclusive financial adviser to Gland Pharma and KKR.
KKR starts minting money from India
KKR had invested $200 million to pick up a stake of around 38% in Gland Pharma around two years ago, according to VCCEdge, the data research platform of VCCircle. The deal was announced in November 2013 but was closed in August 2014.
KKR had acquired the stake through a mix of fresh issue of shares and a secondary transaction where it bought the shares held by healthcare-focused PE firm Evolvence India Life Sciences fund.
KKR will pocket around $500 million from the exit. This translates into well over 50% in internal rate of return (IRR) in dollar terms for KKR and much higher in Indian rupee terms. PE firms typically target IRR of 20-30% in local currency of target firms, so this deal has churned out stellar returns for KKR.
Earlier this year, KKR struck its second exit activity from India as it decided to sell its controlling stake in off-highway tyre maker Alliance Tire Group (ATG) to Japan's Yokohama Rubber. Yokohama said it would buy ATG for $1.18 billion (Rs 7,880 crore) to expand its commercial tyres business. Headquartered in Amsterdam, ATG has two plants in India and one in Israel.
With an estimated 90% stake in ATG, KKR likely pocketed $1.06 billion from the deal, more than doubling its initial investment value. The PE firm had announced the investment in ATG in 2013.
Last year, it had also exited telecom tower firm Bharti Infratel with modest returns.
PE firms need to show good returns to their own investors to raise fresh funds. Lack of big profitable exits from India has been one of the main grouse of limited partners as investors in PE funds.
KKR’s stake sale in ATG was the single-biggest PE exit transaction from an India-related company in the last decade, according to VCCEdge.
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