London-listed GlaxoSmithKline plc announced a voluntary open offer to increase its stake in its publicly-listed pharmaceuticals subsidiary in India, GlaxoSmithKline Pharmaceuticals Limited, from 50.7 percent to up to 75 percent at a price of Rs 3,100 per share.
GSK added that it intends to keep the company listed, which means it will not hike its stake any further after the open offer. Securities regulations in India require a minimum public shareholding of 25 percent for a company to maintain a public listing.
The open offer, in which the parent firm intends to buy 2,06,09,774 shares, or 24.3%, of the company, represents a premium of about 26 percent of the stock's closing price on December 13. The total stake hike would cost the parent firm nearly Rs 6,400 crore or about USD 1 billion.
"For GSK, this transaction will increase exposure to a strategically important market and for our Indian pharmaceuticals subsidiary’s shareholders we believe it offers a good liquidity opportunity at an attractive premium," David Redfern, Chief Strategy Officer, GSK, said in a statement.
“GSK has a proud heritage in India. Today’s announcement is a further demonstration of our long-term commitment to the country having increased our holding in our consumer business earlier this year and more recently committed to a significant manufacturing investment.”
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HSBC Securities is the manager for this open offer.
CNBC-TV18's Aastha Maheshwari had broken this story in May 2013.
The transaction will be funded through GSK’s existing cash resources, will be earnings-neutral for the first year and accretive thereafter and will not impact expectations for the group’s long-term share buyback programme, the parent company said.
Expensive valuations?
Sales have been sluggish for GSK Pharma in the past few quarters: the company clocked sales of Rs 626.65 crore in the September quarter, compared to Rs 675.99 in the year-ago quarter.
Margins were even more pressured with net profit in the most recent quarter coming in at Rs 100.95 crore compared to Rs 152.35 crore year-on-year.
The results were severely impacted by five of its key drugs coming under the National Pharmaceuticals Pricing Policy, which put a cap on pricing.
The company also ran into trade problems in mid September with several distributors refusing to stock its drugs demanding margins of 10%-20% as opposed to the 8%-16% offered to them.
At the open offer price of Rs 3,100, the stock would be trading at 48 times 2012 earnings-per-share.
Should you tender in?
“At the premium of 26 percent over Friday’s closing, this is a good price,” Ranjit Kapadia, Pharma Analyst, Centrum Broking, said. “The stock’s valuations are stretched: it is trading at 44 times calendar year 2013 and about 35 times calendar year 2014 estimates.”
Referring to GSK's November announcement of investing Rs 850 crore in setting up a manufacturing facility in Bangalore, he said it appears the company intends to make India a manufacturing hub.
Talking about the stock’s fundamentals, he said things should improve after resolution of trade issues that had plagued the firm even though the price-control drug policy would continue to remain an overhang.
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