The recent speculation about pharmaceutical giant GlaxoSmithKline is different for me though for several reasons:
- Size of Holding: My GSK holding is by far the biggest single holding I have at about 10%.
- Dividend Contribution: Its weight in my portfolio and dividend yield means that it contributes about 15% of my current dividend income.
- 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.
- 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.
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:
- Johnson & Johnson--16%;
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.
So, now the big question. How much do they think?
- 25% said a bid of $140 billion to $150 billion (£91 billion to £97.5 billion)
- 25% said a bid of $150 billion to $160 billion (£97.5 billion to £104 billion)
- 38% said a bid of $160 billion or more (£104 billion)
- 12% said no bid
- £18.68 to £20.02 per share (38% to 48% premium)
- £20.02 to £21.36 per share (48% to 58% premium)
- £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:
- £18.68 would be a capital return of £3642.60 (20% profit)
- £20.02 would be a capital return of £3903.90 (29% profit)
- £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:
- £3642.60 would need an average replacement yield of 4.3%
- £3903.90 would need an average replacement yield of 4%
- £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.
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)]