From THE HINDU group of publications
Sunday, February 25, 2001


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Glaxo-SmithKline: Higher valuation

Sanjiv Shankaran

RECOMMENDATION:THE biggest benefit of the proposed merger between Glaxo India and SmithKline Beecham Pharma is likely to be the creation of a company with a size and product variety that will ensure market dominance for a long time to come. For the equity investor, the merger is likely to lead to a higher valuation for the combined entity than the valuation they receive as stand-alone companies.

SmithKline Pharma has not been considerate to minority shareholders, a factor that has adversely impacted its valuation. Intentions expressed by Glaxo, thus far, suggest that the merged entity will be the main beneficiary of the support given by their parent, and this is likely to make SmithKline shareholders better off in the long run-earlier a wholly owned subsidiary of the parent cast a shadow on SmithKline Pharma.

Yet, it may be prudent to avoid any fresh exposures to either company for the present. Both the companies have to deal with a worrisome situation: declining or stagnant sales. Cost-saving may partially offset the problem and shore up profit, but it cannot be a long-term solution.

Over a couple of years, their sales have been adversely impacted by a combination of factors, the most important being a higher level of competition and increased customs duty for a key SmithKline product.

Glaxo has responded by restructuring its marketing arm and rationalising its product portfolio. But the impact of these moves are unlikely to felt in the immediate future.

For the moment, the stocks may see a limited uptrend in the wake of improved sentiments. But the real re-rating may come about only when the merged entity is able to shrug off the problem of sluggish sales. Till such time, investors may avoid an exposure to the stocks.

BACKGROUND:Glaxo India and SmithKline Beecham Pharmaceuticals (India) announced on Friday that they would initiate a merger exercise. Under the merger scheme, shareholders of SmithKline Pharma will get one share of Glaxo for two shares held.

The merger exercise in India was triggered by a global merger between the companies. Currently, Glaxo India trades around Rs 442 while SmithKline Pharma trades around Rs 205. Their share price almost fully reflects the merger ratio, thereby leaving limited room for one of the stocks to move sharply to reflect the merger ratio.

INDIAN OPERATIONS: Glaxo India is the biggest pharmaceutical company operating in the domestic market with a market share of about 4.59 per cent. The company recorded a turnover of Rs 935 crore and a net profit of Rs 70.54 crore in 2000.

SmithKline Pharma recorded a net profit of Rs 30.47 crore on a sales of Rs 319 crore in 2000.

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