Glaxo's £1.6bn Takeover Is Thrown Out

Published in Company Comment on 19 April 2012

GlaxoSmithKline's $2.6 billion bid for a US-listed partner is hastily rejected. What next?

This afternoon, 'big pharma' giant GlaxoSmithKline (LSE: GSK) admitted that its formal approach to purchase one of its development partners was abruptly rebuffed last week.

Just say no to Glaxo

GSK's attempt to envelop Human Genome Sciences (NASDAQ: HGSI.US) in a big bear hug backfired when the HGS board of directors immediately rejected its takeover bid.

On 11 April, GSK offered $13 a share in cash to acquire the entire equity capital of HGS, which is working with GSK to co-develop three drugs: Benlysta (to treat systemic lupus erythematosus), albiglutide (to treat type 2 diabetes) and darapladib (to inhibit lipoprotein-associated phospholipase A2 and, possibly, atherosclerosis).

Yesterday, HGS shares closed at $7.17, so GSK's offer represents an 81% premium to the closing price on 18 April.

In his 11 April letter to Thomas Watkins, CEO of HGS, GSK's chief executive Sir Andrew Whitty explained that this $13-a-share offer offered a 73% uplift to the HGS closing price of $7.53 on 10 April, as well as a 66% premium to its 30-day average trading price of $7.83.

Given the generosity of this deal, and the fact that GSK and HGS have worked together for nearly 20 years, many HGS shareholders might be tempted to bite GSK's arm off. However, Tom Watkins and his team instantly rejected this approach without even putting it before their shareholders.

Mr Market reacts

HGS is attractive to GSK because absorbing it into GSK's corporate body would give the UK's biggest pharmaceutical company full control of three promising drugs in co-development. However, HGS's wider portfolio could also lure other big-pharma buyers keen to snap up a prized biotech asset.

Hence, in pre-market action before the NASDAQ exchange opened for business this afternoon, HGS shares were trading at $14.28, up 99% and therefore almost double yesterday's closing price.

In his 'Dear Tom' letter last week, Sir Andrew Witty remarked: "...[W]e believe there is clear strategic and financial logic to this combination for both companies and our respective shareholders -- and that now is the appropriate time in the evolution of our relationship for our two companies to combine."

Sir Andrew went on to claim: "This offer reflects full and fair value for Human Genome Sciences and the synergies inherent in this combination. It also eliminates substantial execution risk for Human Genome Sciences shareholders and delivers immediate and certain value that is superior to what we believe Human Genome Sciences can reasonably expect to create as a standalone company."

Obviously, Mr Market disagrees, as HGS shares are set to open above comfortably above the $13 a share on the table from GSK.

What next for GSK?

With nearly 200 million HGS shares in issue, GSK's bid of $13 a share is worth around $2.6 billion (£1.6 billion). While this is a big number, it is tiny in comparison with GSK's market value of nearly £74 billion.

What's more, GSK claims that combining the two companies will produce cost savings of at least $200 million by 2015, with the transaction being earnings-enhancing from 2013.

As I write, GSK shares are up more than 1% at 1,460p, which suggests that its shareholders like the look of its latest corporate land-grab. Hence, I suspect that GSK will have no choice but to raise its game, perhaps lifting its offer for HGS above $15 a share.

Lastly, as a long-term shareholder in GSK, I am delighted that the FTSE 100 firm is using its financial muscle, ultra-low borrowing costs and strong balance sheet to make a play for attractive assets. It's about time this high-yielding, 'boring' mega-cap saw a bit of acquisition action!

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> Cliff and The Motley Fool both own shares in GlaxoSmithKline.

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Comments

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CunningCliff 19 Apr 2012 , 2:34pm

So, the big question is: will GSK walk away or overpay?

This is always the big problem in M&A deals!

Cliff

CunningCliff 19 Apr 2012 , 3:36pm

HSG now trading at $14.39, so more than double yesterday's close of $7.17. A nice overnight gain, but this values HSG at over $260 million more than GSK offered.

No thank you, GSK, says Mr Market! ;0)

Cliff

CunningCliff 19 Apr 2012 , 4:31pm

Er, that should read HGS in my previous post, not HSG. Oops!

Cliff

RobinnBanks 22 Apr 2012 , 6:07pm

Still waiting for the improvement in share price after Glaxo Welcome took over Smithkline Beecham!

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