An Offer You Can't Refuse

30 Nov,2012 13:13 IST

An Offer You Can't Refuse

At Rs 3,900/share, Glaxo Smithkline to invest Rs 5,220 cr to take majority stake in healthcare unit

Prasad Sangameshwaran


Last week, the UK-headquartered healthcare and consumer goods giant, Glaxo SmithKline Group announced a voluntary open offer to increase its stake from 43.2 per cent to 75 per cent in its publicly-listed consumer healthcare subsidiary in India, GlaxoSmithKline Consumer Healthcare (GSKCH).

The offer through which GSKCH will buy back 31.8 per cent of the company’s shares, will be at a price of Rs 3,900 per share. At that price, existing shareholders can expect 28 per cent premium on the company’s closing share price on the National Stock Exchange (NSE) on 23 November and 22 per cent on the 12 month high price on the Bombay Stock Exchange (BSE).

At Rs 3,900 per share, the company is expected to invest approximately Rs 5,220 crore or £591 million in increasing its stake. The transaction will be funded through GSK’s existing cash resources. The offer period is expected to begin in January 2013.

In India, GSKCH had a turnover of over Rs 2,800 crore in the financial year ended 31 December, 2011 (approximately £380 million at 2011 average exchange rates) with a compound annual growth rate (CAGR) of over the past five years of 19 per cent.

David Redfern, Chief Strategy Officer, GSK said that this initiative represents a further step in GSK's strategy to invest in the world's fastest growing markets. “We believe GSK Consumer Healthcare is a well established business in India and its leading product, Horlicks, is an iconic household brand. The buyback offers a liquidity opportunity at an attractive premium for existing shareholders," he said.

Apart from India, GSK has also initiated a similar open offer to increase stake in its Nigerian consumer business to 80 per cent from the existing 46.4 per cent. “The parent has a strategy to raise its stake in high-growth emerging market subsidiaries,” says a report from Standard Chartered.

Kaustubh Pawaskar, a research analyst for FMCG and hospitality at Sharekhan adds that initiatives like these will help the company in the long term and sustain growth prospects as the GSKCH gameplan gets bigger in India. For instance, the company has diversified its portfolio in India from its earlier MFD (Milk food derivatives) centric portfolio to a complete foods portfolio comprising biscuits, oats and noodles. Then, like most MNCs, even GSKCH is seeing a value in emerging markets.

With a 75 per cent control, once the buyback offer is completed, will GSKCH delist from Indian bourses?
After all, securities regulations in India require a minimum public shareholding of 25 per cent for a company to maintain a public listing in the country. GSKCH executives deny any such move. “While theoretically delisting can never be ruled out, we doubt if the company which has been comfortable with listed subsidiaries will opt for this expensive proposition. Plans to keep minimum free float in both Indian and Nigerian business reinforce this view,” says the Standard Chartered report.

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