GSK to raise India unit stake in Rs 5,220 cr deal

Tags: News

Stock jumps 20% after open offer at 28% premium

The UK-based GlaxoSmithKline (GSK) has announced an open offer to increase its stake in its consumer healthcare unit in India, GlaxoSmithKline Consumer Healthcare, from 43.2 per cent to up to 75 per cent through a voluntary open offer priced at Rs 3,900 a share.

The potential value of the transaction is pegged at Rs 5,220 crore, far exceeding the 2011 annual sales of the Indian arm. The offer will increase the hold of the parent company over the firm that markets the Horlicks brand in India.

The offer price was at a premium of about 28 per cent to Friday’s closing price of Rs 3,049.35 per share on the National Stock Exchange (NSE).

The announcement sent the stock soaring and it was locked at the 20 per cent upper circuit on both the exchanges. The share was frozen at Rs 3,651.80 on the Bombay Stock Exchange (BSE) and at Rs 3,659.20 on NSE. At Monday’s close, the stock price was still 6.79 per cent lower than the offer price.

As of September end, the latest period for which the shareholding data is available, the company’s largest non-promoter shareholders were Arisaig Partners Asia (5.01 per cent), Life Insurance Corporation of India (4.23 per cent), General Insurance Corporation of India (3.16 per cent), HDFC Standard Life Insurance (2.64 per cent) and Intrade (1.75 per cent). Together, these five institutional investors held a 16.79 per cent stake in the firm. Winning over these shareholders and other foreign investors, banks and mutual funds will be crucial for the success of the open offer.

As of September, mutual funds and UTI held 8.86 per cent in the company, while financial institutions and banks held 8.58 per cent, foreign institutional investors 14.45 per cent and corporate bodies 9.55 per cent. Individual shareholders with shares worth up to Rs 1,00,000 in value held 11.67 per cent, while individuals with nominal share capital in excess of Rs 1,00,000 held 3.41 per cent.

Subject to regulatory clearance, the offer period is expected to begin in January. Payment for the shares will take place shortly after the closure of the offer.

Ranjit Kapadia, vice-president for institutional research at HDFC Securities, said: “Shareholders could possibly surrender their shares, given the upside to the current market price.”

GSK is one of the last MNCs in India’s FMCG industry which does not have a 51 per cent controlling stake in its Indian arm. If the open offer is successful, it will enable the British parent to hike its stake in the Indian arm to the maximum level permitted in a listed company by Securities and Exchange Board of India (Sebi).

The move is a sign of the parent firm’s commitment toward its listed associate, analysts said. The parent company has also made an open offer to hike its stake in its Nigerian associate to 80 per cent, which indicates the promoter firm’s focus on emerging markets.

“GSK Consumer Healthcare is a well-established business in India and its leading product, Horlicks, is an iconic household brand,” David Redfern, chief strategy officer of GSK, said in a statement. “This transaction represents a further step in GSK’s strategy to invest in the world’s fastest growing markets, and we believe, it offers existing shareholders a liquidity opportunity at an attractive premium,” Redfern said.

The transaction will be funded through GSK’s existing cash resources. It will be earnings neutral in the first year and accretive thereafter; and will not affect expectations for the group’s long-term share buyback programme, the statement added.

Most experts believe long-term investors should stay invested given GSKCH’s strong business prospects and possibility of further re-rating. Shirish Pardeshi, co-head of research at Anand Rathi Institutional Equities, said he expects new launches from the parent company.

“In the long term, this could mean increase in dividend payout ratio to above 80 per cent from 35 per cent at present. The open offer, too, is rewarding for investors. The stock would move up further. We have a buy recommendation on the stock,” Pardeshi said.

“It’s a win-win situation for both the companies. GSK Consumer Healthcare may become more aggressive with its branding, marketing and distribution,” said an analyst with a brokerage promoted by a Mumbai-based company.

GSK’s consumer healthcare business in India generated over Rs 2,800 crore turnover in the financial year ended December 31, 2011, with a compound annual growth rate (CAGR) of 19 per cent over the past five years.

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