Shanghai Fosun Pharmaceuticals Group Co. announced in July last year that it would acquire an 86.08 percent stake in Gland Pharma for US$1.26 billion. It marks the biggest outbound deal by Chinese firms in the pharmaceutical sector, as well as the largest acquisition by a Chinese firm in India.
However, the deal has suffered several setbacks. First of all, Chinese authorities suddenly tightened scrutiny of outbound merger and acquisitions earlier this year.
China’s top banking regulator is said to have ordered loan checks on several of China’s largest overseas asset buyers, including Fosun, Wanda and HNA.
Fortunately, Fosun was able to ride the storm. It was later openly praised as a model of “reasonable outbound acquisition” by leading state mouthpieces such as the People’s Daily and CCTV, suggesting the domestic regulatory issue has been resolved.
But then the second hurdle came. Indian and Chinese troops has been engaged in a tense face-off along a disputed border in western Himalayas since July, and the political tension has threatened to jeopardize the deal.
In fact, the deal to take over Gland Pharma needed to be approved by the governments in China, India and the United States. Both China and the US had approved the deal, but the green light from India’s Cabinet Committee on Economic Affairs was still being awaited.
The delay could be linked to the intensifying tension along the border of China and India.
Military tension aside, there were other risks too. India has an enemy property law targeting both China and Pakistan. Under the law, the government could seize assets of Chinese and Indian companies in the country, if either China or Pakistan is at war with India. That means Fosun’s mega investment in India may be confiscated if Chinese and Indian troops start firing shots at each other.
To address these potential problems, Fosun has decided to revise the deal and lower the stake it planned to take in the company from 86 to 74 percent for US$1.09 billion. The company’s shareholders are entitled to sell the remaining stake to Fosun for US$355 million within one year.
If an Indian company wants to sell more than 75 percent stake to a foreign buyer, it has to obtain approval from Cabinet Committee on Economic Affairs. Therefore, Fosun has made the tweak to get around the regulation.
“The proposed deal no longer requires approval from the Foreign Investment Promotion Board and Cabinet Committee on Economic Affairs. The transaction has met all prerequisites,” Fosun said in an exchange filing.
Why is Fosun so eager to buy Gland Pharma?
Gland Pharma exports its drugs to Europe and the US, and it’s the first drug maker in India that has obtained approval from the US Food and Drug Administration and met GMP (good manufacturing practice) standards.
As such, the deal has great strategic significance for Fosun.
It would enable Fosun to open up markets in developed countries, leveraging on Gland Pharma. And the company can also introduce Gland Pharma’s drugs into the mainland market. R&D cooperation and other synergies are also possible in the long run.
Last but not least, Fosun may eventually tap into India’s massive healthcare market.
But of course, buying is the easy part; running the business and integrating Gland Pharma into the Fosun group is the real test.
This article appeared in the Hong Kong Economic Journal on Sept. 19
Translation by Julie Zhu
[Chinese version 中文版]
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