GSK Pharmaceuticals Open Offer: What Should Investors Do?

It seems to be raining open offers in the Indian equity markets, with more and more MNCs opting for this route. Most recently, HUL opted for an open offer a few months ago. Earlier too, many had gone ahead with buy backs and open offers, including Fresenius Kabi Oncology, Fairfield Atlas, Siemens and Atlas Copco, to name a few.

In one of our earlier write-ups, we had mentioned that many MNCs had announced open offers seeking to take advantage of a weaker rupee against the USD. While some of these went through smoothly, the likes of HUL witnessed a lot of resistance from institutional investors.

Now GSK Plc, the parent company of GSK Pharma, has announced a voluntary open offer for the acquisition of around 2.06 crore equity shares (face value of Rs 10 each) at Rs 3100 per share. This represents 24.33% of the fully diluted voting share capital of the company.

If we consider the current shareholding pattern, the open offer would help the promoters raise their stake to 75% from the levels of 50.67%. The offer opens on February 7, 2014 and will close on February 20, 2014.

Considering all of this, should GSK Pharma’s investors tender their shares in the open offer or hold them?

The Expected Issues

Looking at the current shareholding pattern, we feel that there may be a few roadblocks for the open offer to get completely subscribed.

One key issue is related to the institutional shareholders, which hold 34.37% stake. Currently, LIC holds 5.69% stake. We feel that it is unlikely to tender shares in the open offer, as it would try to get a bigger chunk of the pie and higher returns by staying invested. The company did tender shares at the time of HUL’s open offer, but that was the need of the hour as the government needed forex reserves that time. Similarly, 13.37% stake lies with Aberdeen Capital. No other FII has a meaningful stake. There are close to 1 lakh shareholders holding 13.45% of the stake, and we feel that the promoters are eyeing that stake.

Another reason why we feel that the offer may not get a good response is closely related to its sister concern, GSK Consumer Healthcare, which had come out with an open offer in the past. As a part of that offer, the promoters had offered Rs 3900 per share to increase their stake from 56.84% to 72.46%. The offer remained undersubscribed and the scrip is trading at Rs 4400 now, thus handsomely rewarding those shareholders who were patient. It also needs to be remembered here that the scrip touched a high of Rs 6348 after the open offer.

Hence, taking the cues from the previous offers, we opine that retail shareholders should not tender their shares in this open offer. We feel waiting for the corporate action to lead to a surge in the scrip price is the prudent strategy, as the stock will be re-rated after the open offer closes.

Sector Set For Re-Rating

Pharmaceutical MNCs are looking for consolidation, and the merger of Pfizer and Wyeth was an example of the same. This amalgamation was a win-win scenario for shareholders of both the companies as well as for the managements. We feel that the sector would get re-rated soon and larger players like GSK Pharma should benefit from this.

Therefore, investors would do well to be patient and hold shares of GSK Pharmaceutical with a long term view.