Global investment firm KKR on Thursday announced that it has entered into an agreement to purchase a controlling stake in JB Chemicals & Pharmaceuticals (JBCPL), one of the leading Indian pharmaceutical companies specializing in branded formulations.

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The deal structure has two important aspects - promoter stake sale and the open offer. KKR will acquire its stake for over $500 million at Rs 745 per share and make an open offer for an additional 26 percent of the company.

Foreign ownership for the pharma sector is capped at 74 percent via automatic route, therefore, KKR’s stake cannot breach 64.9 percent given FII holding in the stock. Promoters own a 55.9 percent stake in the company and whether they can exit completely depends on the success of the open offer.

The deal structure entails promoters selling 10 percent stake off-market, the second tranche of 29 percent will be sold on-market via blocks to KKR, making it 39 percent sale till open offer. If open offer is fully tendered, then KKR will own 39 percent and 26 percent making it 65 percent stake at which it is capped.

In case the open offer is not fully tendered, the promoters will sell the deficit stake from the remaining 17 percent held by them at the same value of Rs 745/share. As per the agreement, KKR needs to buy controlling stake in the company with the mix of purchase from the promoters and open offer.

Promoters have a right to sell their entire stake even after the transaction is completed. If it’s sold to KKR, it will be at Rs 745/share.

This is not the first deal in which foreign ownership norms have guided the deal construct. KKR investee company Gland Pharma was sold to Fosun Pharma under the same constrains for which the deal construct had been changed and the promoter could not exit completely.

Rs 745 per share is above the 52-week highs of the stock despite the run-up. In terms of PE multiples, it is at a discount to peers that have larger scale and size. If promoters intend to exit completely then there could be an overhang on the stock after the initial euphoria around the deal with a marquee private equity firm.

First Published:Jul 3, 2020 10:51 AM IST