GSK Pharma’s Open Offer - What Stance Should Investors Take?

The Cabinet Committee of Economic Affairs (CCEA) has approved the proposal of GlaxoSmithKline group for acquisition of 24.33% of shares of its existing Indian subsidiary GlaxoSmithKline Pharmaceuticals. The acquisition will happen by way of an open offer as per SEBI regulations. 

At present, the company has a stake of 50.67% in its Indian subsidiary, which will go up to 75% after the buyback of 2060977 shares. This means that after the buyback, the number of shares outstanding in the market will reduce. 

According to the SEBI regulations, a listed Indian company requires at least 25% of the public shareholdings to maintain it as a public listed company. It means that to keep the company as a public listed in India, it will not raise its stake in the GSK Pharma anymore.

The Institutional investors hold around 34% of the stake in the company. The two major institutional stakeholders are Aberdeen Capital (13.37%) and LIC (5.69%). It is unlikely that they are going to tender their shares in the open market, as they will like to maintain their stake. 

Meanwhile, the company has not performed well in the quarter ended December 31, 2013. The topline in the Q3FY14 has reduced by around 4% on YoY basis compared to the same period of the previous year. The bottomline also came down by more than 15% YoY to Rs 116.88 crore compared to the same quarter of the previous year. The bottomline plunged due to an increase in the total expenses (up by 11% YoY). The total expenses went up because of the rise in material expense (up by 50% YoY) and adverse exchange rate movements.

In spite of weak financial performance in the Q3FY14, GSK Pharma has been successful in attracting the attention of the shareholders. The company planned to buyback its shares at a premium of 26% to the closing price of the GSK Pharma before the offer was announced. 

The open offer was announced on December 16, 2013, while on previous day (December 15, 2013) the share closed at Rs 2468.10. The open offer will be at Rs 3110 per share, which started from February 18, 2014 and will end on March 5, 2014, incurring a total amount of around Rs 6400 crore.

The move is aimed to increase promoter’s holdings and bring in-line with its global holding structure. According to the annual report (2012), other than the Indian and the Chinese subsidiary, the company has promoters’ stake of more than 75% in over 100 subsidiaries around the world. In India and China the promoters’ stake is at 51% and 55% respectively. 

Now, what should a retail investor do? There have been mixed sentiments earlier on such offers. GSK Consumer Healthcare came up with an open offer with a price of Rs 3900 per share which went to Rs 5847 in the month of June 2013. The current share price of the company is Rs 4290.  Hindustan Unilever also came up with an open offer at a price of Rs 600 which was at a premium of 20.5%. The scrip price went up to Rs 714 in the month of July 2013 and currently the share is trading at Rs 554.  

The company is trading at PE (TTM) of 50.80x, which is trading much higher than the Industry PE (37x). Pharmaceutical business is a consumer business and the industry is performing well and we expect the sector to do well in the future. We will advise our investors who have long-term investment horizon to stay invested in the stock due to future outlook. The company has announced Rs 864 crore investment plan and new factories for pharmaceutical products in the Indian market, which will help the company perform better.