With the Federal Trade Commission (USA) finally, approving the Glaxo–SmithKline merger, the merger between Indian affiliates is also on the anvil. Infact, changes in the management structure in Glaxo have been happening over the last three months to put in place a structure for the unified entity.
First, came the appointment of Mr. Thiyagrajan who took over from Mr. Khusrokhan as CEO of the company. Mr. Thiyagrajan, headed Glaxo operations in the South East Asia and his coming back to head Glaxo’s operations were seen as the parent’s desire to merge the operations of the two companies sooner than later. Next came the replacements of Mr. Bandopadhaya, VP, Information Technology and Mr. Anil Mathai, VP, Exports by SmithKline officials.
There have also been press reports that two divisions of Glaxo – the veterinary division Agrivet Farm Care and Qualigens Fine Chemicals are on the block. The management however, has denied these reports.
There is also the question of what happens to sister concerns of these two companies viz. Burroughs Wellcome and SmithKline Consumer. There is also another entity, SmithKline Beecham Asia, a 100% subsidiary of the SmithKline. (Glaxo, does not have a presence in India via a 100% subsidiary.) This however, is likely to serve as the 100% arm of the merged entity.
Burroughs was not merged into Glaxo in India because of the fact, that wages for the workers in Burroughs were higher than those in Glaxo. While the management was willing to make a one time payment, the workers were adamant. This prompted the management to keep the company separate, though the marketing operations of Burroughs were integrated with Glaxo.
SmithKline Consumer owns the ‘Horlicks’ brand and is the market leader in the malted food segment. It recently took over ‘Maltova’ and ‘Viva’ too. However, internationally, SmithKline is more of a pharma company with the major operations of ‘Horlicks’ concentrated in the UK, apart from a sizeable presence in India. Glaxo has already sold its foods portfolio (comprising ‘Farex’ and ‘Glucon D’) worldwide. Even in India the food division was sold to Heinz.
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. If one were to make a forecast the full year earnings, Glaxo would end up reporting a net in the range of Rs 820 m, SmithKline would in all probability end up with a net in the range of of Rs 240 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.14.80.
At a price earnings of around 35, the merged company could quote at levels of Rs 520–530. While Glaxo currently quotes at a price of Rs 479, SmithKline Pharma is quoting at the price of 208. The current market prices are actually indicative of a 1:2.3 ratio (i.e. one share of Glaxo for every 2.3 shares of SmithKline Pharma).