Glaxo Pharma Voluntary Open Offer Announced: What Next?

By Geetanjali Kedia

London Stock Exchange listed GlaxoSmithKline Plc, as promoters of GlaxoSmithKline Pharmaceuticals Limited (GSK Pharma), has announced a voluntary Open Offer for acquisition of 2.06 crore equity shares of Rs. 10 each, representing 24.33% of fully diluted voting share capital of the company, at a price of Rs. 3,100 per share.

The Rs. 6,389 crore open offer, tentative opening and closing date for which is around 7^th and 20^th February 2014 respectively, will help increase current promoter holding of 50.67% to the maximum permitted limit of 75%, if the offer is fully subscribed to.

GSK Pharma, a 90 year old research-based healthcare and pharmaceutical company with 4.2% domestic market share is the largest pharma MNC operating in India. It had CY2012 revenue of Rs. 2,626 crore and net profit of Rs. 577 crore (after a one-time exceptional loss of Rs. 100 crore, net off tax, on account of VRS and other costs at Thane facility). It reported EPS of Rs. 68 for CY12 and paid Rs. 50 dividend to shareholders, implying a liberal dividend policy with payout ratio of 86% (including corporate distribution tax). Due to new drug price control policy and supply chain constraints in the latter half of CY13, performance suffered in the first 9 months of CY13, with revenues and net profits at Rs. 1,909 crore and Rs. 385 crore respectively.

A glance at the current shareholding pattern, as of 30^th September 2013, indicates that the open offer will not see full subscription:

1. LIC, holding 5.69% stake, is unlikely to tender its shares.

In the case of Unilever’s US $ 4.5 billion open offer to HUL shareholders at Rs. 600 per share in July this year, LIC and other PSUs were urged by the Govt. to offer their shares to earn the much-needed forex reserves, in order to stabilise a sharp depreciating rupee.

Hence, LIC off-loaded its entire 3.22% or 6.96 crore shares for Rs. 4,177 crore. No such compulsion exists now.

Hence, even GIC holding 1.18% stake is unlikely to participate in the open offer.

2. Of the 157 FIIs holding 23.88% stake in GSK Pharma, Aberdeen holds a substantial 13.37%, and may not part with its bounty. No other FII has a meaningful holding of over 1% in the company.

3. Close to 1 lakh retail investors collectively own 13.45% stake. Consolidating this widespread holding or cornering the shares by the foreign promoter seems to be the object of this voluntary open offer.

Sister company GlaxoSmithKline Consumer Healthcare (GSK Consumer) has undertaken a similar voluntary open offer in January 2013, wherein, the parent offered Rs. 3,900 per share and increased its holding from 56.84% to 72.46% in the company. Due to lower response, offer remained under-subscribed and the promoters could not touch the intended 75% threshold.

The current share price of GSK Consumer at Rs. 4,500 represents over 15% premium to the open offer price of Rs. 3,900, thus handsomely rewarding the patient shareholders, who did not tender their holding in the open offer at the beginning of the year. Infact, GSK Consumer’s share price had even touched a high of Rs. 6,348 on 31^st May 2013, which implies a too-good-to-be-true 63% return in barely 4 months after the closure of open offer.

Thus, taking cues from a year old data, retail shareholders of GSK Pharma must not tender their shares in the open offer. Instead, wait for the corporate action to lead to a surge in share price, as the stock will be re-rated on closure of the open offer.

Multi-national pharma companies in India are looking at consolidation of their operations and ownerships, in this high growth and under penetrated market, recent case being the amalgamation of Wyeth with Pfizer. Shareholders of both these companies have earned good returns in the form of dividends and capital gains, as the corporate M&A unfolded.

To cut the long story short, GSK Pharma’s current share price of Rs. 2,925 is neither an exit point now, nor is the Rs. 3,100 open offer price in February next year. Retail investors must stay away from the open offer and hold their shares tight. The open offer will see muted response and is likely to remain under subscribed.

Eventually both GSK Pharma and GSK Consumer, are likely to get delisted from the bourses, over the next couple of years.

P.S.: We had recommended GSK Pharma in our Market Whispers column (in the Member Zone) at Rs. 2,470 just last Thursday on 12th December 2013!