Is a 74% stake in Chinese hands really that different from an 86.1% stake? That’s a question India’s government may not get to answer.

China’s Fosun Group has decided to acquire a lower stake of 74% in India’s Gland Pharma Ltd, which makes the transaction eligible for automatic approval. Its earlier bid for an 86.1% stake has gathered dust for over a year waiting for government approval.

The revised disclosure from Fosun Group indicates that it has all other clearances for the transaction and at 74%, it will not need the government’s approval for this foreign investment. It states that the deal should close on the 17th day after satisfying conditions are fulfilled or waived.

Existing FDI (foreign direct investment) guidelines specify automatic approval for investments up to 74%, as long as preconditions such as maintaining research expenditure and production volumes are met. The government’s intention is to ensure that domestic pharmaceutical capabilities and capacity continues to grow.

The revised disclosure only says that the founders wanted to retain a higher share in the business, which is doing well, and hence the 74% stake. It makes no mention of the delays in securing approval but news reports have indicated that border tensions with China may have been one reason for the delay.

So, what has essentially changed in the deal? The original deal would have seen the Fosun Group pay $1.2 billion (Rs7,685 crore) to acquire an 86.1% stake, out of which the founders were to sell a 31.6% share while retaining a 10% stake. Private equity firm KKR and Co. would sell its entire 38.4% stake. Both would receive $96.90/share for their stakes. In addition, Fosun would acquire shares from the Vetter family, and subscribe to convertible debentures, both at a price of $64.50/share, for the remaining stake.

In addition, a payment of up to $50 million hinged on a drug launch and the founders also had a put option to sell their remaining 10% stake for $180 million. This was priced at a premium of 20% a share compared to the share sale.

Incidentally, Gland Pharma had committed to an initial public offering (IPO) within five years of the deal closing. If the intention was always to list Gland Pharma, then listing guidelines would have anyway forced Fosun to lower its stake to below 75%. A listing would also mean more transparency and the residual shareholders (owning a 13.9% stake) would get more liquidity and perhaps a better price as well.

The blended valuation, taking the total price payable for the 86.1% stake, worked out to $1.4 billion.

What about the revised transaction? The revised disclosure says the founders’ stake will increase, implying KKR will sell all its shares. Thus, the founders are likely to sell a lower stake of 19.5%, down by 12.1 percentage points. Fosun has disclosed the combined amount payable to both parties, which yields a price of $100.90/share or a 4.2% premium over the earlier price.

However, Fosun has not disclosed if both KKR and the founders will get the same per share price. Since the founders are selling fewer shares, they may have got a higher price. Keeping KKR’s price unchanged as earlier, the founders’ per share then price works out to $109/share, or a 12.4% premium.

The put option remains in place but is for a 22% stake now, and the revised price is $355 million or a per share price of $104, which is lower than earlier. The lower value may reflect the higher size of the put, the higher per share price paid to the founders. The blended equity valuation is a bit higher at $1.44billion.

This is as far as the deal mechanics are concerned. What has really changed for Fosun and the government in the revised deal? Fosun will still appoint the majority of Gland Pharma’s nine-member board, unchanged from earlier.

An IPO is still on the cards in a time frame of five years from the deal closing. Since Fosun’s stake cannot go higher under the automatic route, and the government may not approve a higher stake, an IPO becomes a feasible option for an exit. The likelihood of Gland Pharma listing is high, and Indian investors may have the novel choice of deciding whether to invest in a Chinese-owned listed pharmaceutical company.

What about the government? A lower stake for Fosun can be taken as a symbolic point scored but, in the end, Fosun got everything it wanted, with a slightly lower stake being the only casualty.