Tuesday, 28 July 2015

A Bid for GlaxoSmithKline? Running the Numbers on the Buy-out Speculation

I don't normally pay much attention to bid speculation regarding companies I hold. If a bid comes together, fine, I will think about it then. However, without that I generally ignore the noise.

The recent speculation about pharmaceutical giant GlaxoSmithKline is different for me though for several reasons:
  1. Size of Holding: My GSK holding is by far the biggest single holding I have at about 10%
  2. Dividend Contribution: Its weight in my portfolio and dividend yield means that it contributes about 15% of my current dividend income.
  3. Sector Trends: There is a lot of merger and acquisition activity in the healthcare sector which means rumours may not be far off the mark. Indeed, another of my holdings--AstraZeneca--was recently subject to a failed bid by Pfizer.
  4. Prominence of GSK: GSK is a large and widely held international company so I know there will be some interest in these rumours.
As a result, I have decided to humour the rumours and run the numbers both generally and specifically for my own holding.

What Rumours?

The rumours are pretty prevalent. 

However, the most thorough one I have come across across is a result of a poll of pharma industry insiders put together by BioSpace (which I included on my "weekly worthies" a couple of weeks ago).

In total they polled over 400 "industry insiders" from a number of countries (though mostly from America...about 70%).

Of course, such polls are far from perfect but they are--at least-- of interest!

Who and When?

So who do they think would be bidding and when do they think it will come? Well this is what they think. The bidders they suggests read like this:
  • Pfizer--40%;
  • Roche--17%;
  • Johnson & Johnson--16%;
  • AstraZeneca--12%.
Needless to say, Pfizer being at the top is little surprise. They are clearly in the "mood" for a big buy. However, to see AstraZeneca there is a little more surprising.

And when do they think? 
  • Q4 2015--42%
  • Q3 2015--27%
Well, if they are right, we would not have to wait long before a potential bid comes to fruition. Certainly with the generic drug sector's recent burst of activity any deal does seem to be sooner rather than later.

How Much?

So, now the big question. How much do they think?
  1. 25% said a bid of $140 billion to $150 billion (£91 billion to £97.5 billion)
  2. 25% said a bid of $150 billion to $160 billion (£97.5 billion to £104 billion)
  3. 38% said a bid of $160 billion or more (£104 billion)
  4. 12% said no bid
Now, as a Great Britain pounds per share figure this is what they represent (at a share price of £13.52):
  1. £18.68 to £20.02 per share (38% to 48% premium)
  2. £20.02 to £21.36 per share (48% to 58% premium)
  3. £21.36 or more per share (58% or more premium)
Now the fact that even the lowest predictions suggest a massive premium to today's share price is really pretty indicative of the (scarcely) hidden value of the company.

Effects on My Portfolio

So what would these rumoured bids do to my portfolio?

In total, I have invested £3015 in GSK over the years (including reinvested dividends) and hold 195 shares. Therefore any bid as above would look like this as a capital return:
  1. £18.68 would be a capital return of £3642.60 (20% profit)
  2. £20.02 would be a capital return of £3903.90 (29% profit)
  3. £21.36 would be a capital return of £4165.20 (38% profit)
That would be a pretty generous capital return especially if assuming the upper value is "more" likely.

But what about the dividend? Currently, the annual dividend income I get from the company amounts to about £156 a year. In order, therefore, to replace this income I would need to invest in new holdings which yielded:
  1. £3642.60 would need an average replacement yield of 4.3%
  2. £3903.90 would need an average replacement yield of 4%
  3. £4165.20 would need an average replacement yield of 3.8%
Overall, therefore, none of these would mean that I would find it too hard to replace my current GSK income under such bid circumstances. This is a relief in many ways as I would like to keep my upward income progress I have seen so far (see my June 2015 review here) going for the rest of this year and next.

Final Thoughts

So there is the numbers run hypothetically. 

In reality, the idea of GSK being acquired is not at all attractive to me despite the potential short-term profit it would likely provide. 

GSK is my biggest holding for a reason. It is a high-quality company with an excellent collection of assets. Its consumer health division seems to be perpetually undervalued and its shifting focus towards this and vaccines unfairly (in my opinion) derided from every quarter. 

Certainly, they are having short-term troubles (like many of their peers) but over the long-term I see it as a valuable and lucrative investment.

If I had the deciding vote on any such deal I would most likely say a clear "no" to any deal. Of course, this I do not have. 

If a bid did emerge it is quite possible, of course, that we would have another AstraZeneca on our hands. Such a bid may focus attention on the real underlying value of the company and its future rather than current earnings and--as with AZN--force a market rerating of the company.

We will see have to wait and see what happens!

Are you a GSK shareholder? What do you make of the rumours of a bid? Would you find one attractive?

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[Creative Commons image reproduced from Flickr user Ian Wilson (foolstopzanet)]


  1. Interesting post DD.

    To be honest, I was aware of the rumours but haven't really thought any more about it. GSK makes up 11% of my share portfolio but I only have 41 shares. As dividend income isn't my main priority, I've not thought about how they will be affected although maybe I should, seeing as GSK has provided my second highest dividend income so far in my first year of investing (they were beaten by Amlin's special dividend payout).

    My holding's so small, I guess I'm not really concerned. It'll be interesting to see what happens though.

    1. Thanks, weenie.

      Yes, the Amlin special dividend was a nice addition, wasn't it!

      I had not thought about it much up to this point either and was tempted to leave it that way as it is all hypothetical at the moment. But as I started thinking about it I thought I may as well publish my thoughts! As I say, being such a large position for me it seemed imprudent not to at least ponder on it!

      In reality, I don't think we--as shareholders--will lose out either way. I suspect any premium paid would have to be fairly substantial to be accepted by management or shareholders. However, I really do think GSK is better off alone over the long term!

      We will just have to wait and see. It was nice to see that I should not--if any such deal did go ahead--find myself set back too badly with regards my goals!

    2. If I had the cash, I think I could be quite tempted to buy more at the low price!

    3. I agree. It seems extremely under-valued at present so is always high on my watchlist when I am looking for new purchases. Maybe soon!

  2. GSK is about 7.5% of my portfolio and I'm not sure if I'll like a buyout as even with a significant premium it's more than likely going to decrease my dividend income. If they get bought out I'll probably reinvest the money into another pharma company like JNJ but they yield a lot less and their dividend is double-taxed in my case.

    1. I am not surprised to hear so many people are "overweight" GSK!

      That would be the hard part: replacing the yield whilst also retaining some nice exposure to healthcare stocks. JNJ is quite a company. Once I have worked out the most tax-efficient way to do it it will be amongst the first US companies I would invest in.

      Double taxation is quite a hit!

  3. Fascinating post D²!!!

    I love how you break things down into small details, really puts into perspective the value of such potential deals to the average shareholder. I don't own any GSK yet, but it's near the top of my "monkey stocks list " if I go down the route of picking the top 5 FTSE100 stocks.


    1. Thanks, M. Glad you found it of interest.

      Interesting idea. That would throw out some interesting returns, I think.

      I am sorely tempted to fatten up my GSK holding and whilst writing this up I looked into the company further and it just reinforced my opinion of them. I really think that it is undervalued. The problem is that each element of its main businesses have different outlooks. this is great for income diversification but makes it a hard business to value even when so well analysed as GSK.

      One solution, of course, would be to break up the company: pharma, vaccines and consumer. But I think long-term that would be a poor move.

      Can't wait to see your Monkey Stock selection!

  4. I just sold Naked Puts on GSK with 43 Dollar Strike. If the stocks drops further, i will gladly add them to my current holdings and take the dividend. Otherwise i earned a good return on the premium.

    I would not do any calculations on take over speculations. Unless you really do have any insider information, you will be for sure the last to get the information. That would not be a good basis to act on.

    1. It is all Greek to me! I had to look up "Naked Puts" and "strikes." you're braver than I! Glad to hear it worked out well for you.

      I think over the long-term it remains very attractive. Even assuming a dividend cut at the current price you still should get a very good yield. That is a great position to be in.

      I had it recently with Banco Santander. They cut their dividend by 2/3 which still left me with a solid 3% yield. Not bad at all!

      I don't tend to calculate speculative purchases. But as I bumped into them and it represents such a large holding I thought I would put it together as it only took a little while. Clearly there was a lot of interest in it as a lot of readers seem to hold a long-term position in GSK.

      Thanks for dropping by!