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Glaxo–SmithKline merger: sooner than later?

Aug 14, 2000

Glaxo India and SmithKline Pharma, it seems, are proceeding apace with their merger in India much sooner than expected. Though the details are not known, one indication of this came at the analysts meet of Glaxo India when the Managing Director Mr. Khusrokhan refused to talk about the merger saying that it could impact the share prices of the two companies. We have tried to hypothecate about the merger ratio between the two companies assuming of course that Burroughs Wellcome and SmithKline Consumer are kept out of the merger temporarily. While the Glaxo management has clearly indicated that the amalgamation with Burroughs has been put on to the back burner, the decision about SmithKline Consumer is likely to be taken at the global headquarters since Glaxo has already sold its foods portfolio (comprising ‘Farex’ and ‘Glucon D’) worldwide. Even in India the food division was sold to Heinz. SmithKline abroad is more of a pharma company with the major operations of ‘Horlicks’ in the UK apart from a sizeable presence in India.

Both the companies came out of a trough in the second quarter and reported outstanding results despite an adverse industry environment. While Glaxo reported a 27% jump in the topline in the second quarter, SmithKline also reported a 50% jump at the pre–tax level. And this despite a fall in the topline!

If one were to make a forecast the second half keeping in mind the forecast made by Mr. Khusrokhan (he spoke a 15% growth, for the full year at best), Glaxo would end up reporting a net in the range of Rs 800m, SmithKline would in all probability end up with a net in the range of of Rs 200 m.

Assuming a 1:2.5 ratio (i.e. 2.5 shares of SmithKline for every 1 share of Glaxo), the merged entity would end up with an equity of around Rs 716 m (post merger) and a per share earnings of Rs.13.89.

At a price earnings of around 40, the merged company could quote at levels of Rs 560–570. While Glaxo currently quotes at a price of Rs 470, SmithKline Pharma is quoting at the price of 158. Thus if a merger were to materialise the market prices are actually indicative of a 1:3 ratio (i.e. one share of Glaxo for every three of SmithKline Pharma). This could be taking into account the cash and the value of the properties that Glaxo holds. (Glaxo holds cash and marketable investments of almost Rs 600 m besides valuable real estate at Mumbai, which it has leased out.)

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