GlaxoSmithKline takes its $13-a-share offer directly to Human Genome Sciences' owners.
Three weeks ago, I reported that GlaxoSmithKline (LSE: GSK) -- the UK's biggest pharmaceutical company -- had made an unexpected offer to buy a US biotech rival.
GSK really wants HGS
On 11 April, GSK's chief executive Sir Andrew Witty wrote to Thomas Watkins, his counterpart at Human Genome Sciences (NASDAQ: HGSI.US). In a bid worth £1.6 billion ($2.6 billion), Sir Andrew made a formal offer to buy the biotech business for $13 a share.
Despite the near-20-year association between the two high-tech companies, Watkins immediately rejected GSK's offer, which was priced at a 73% premium to the target's 10 April closing price of $7.53.
Nevertheless, as soon as GSK revealed this deal on 19 April, the HGS share price soared, closing at $14.17 that day. Yesterday, it closed at $14.62, which is 12.5% above GSK's offer.
No-one says no to Glaxo
GSK really wants to own HGS so it can take control of three promising drugs in co-development: Benlysta (to treat systemic lupus erythematosus), albiglutide (to treat type-2 diabetes) and darapladib (to inhibit lipoprotein-associated phospholipase A2 and, possibly, atherosclerosis).
In addition, by taking its development partner under its wing, GSK will also gain control of HGS's wider portfolio, which could be sold on to other interested biotech buyers. However, despite citing the "clear strategic and financial logic to this combination", Sir Andrew was unable to convince his opposite number to take GSK's money.
Hence, GSK this morning announced that it is taking its $13-a-share offer hostile by putting it directly to the owners of all 200 million HGS shares. Instead of taking part in the strategic review announced by HGS, GSK has started a tender offer to acquire shares in HGS for $13 in cash.
Will this work?
Personally, I am wholly unconvinced that GSK's latest roll of the dice has any merit whatsoever. After all, why would HGS shareholders surrender their shares to GSK for $13, when they can currently sell them in the open market for an eighth (12.5%) more?
What's more, big deals such as these attract much 'merger arbitrage' activity from hedge funds and other short-term speculators keen to make a fast buck from the target's rising share price. Given that HGS's share price has ranged between $13.99 and $15.49 since 19 April, it seems highly unlikely that any of these opportunist investors will accept a mere $13 a share.
In addition, every HGS investor on the planet knows that mega-cap GlaxoSmithKline (a £72 billion giant) has deep pockets and can afford to raise its bid beyond $2.6 billion. To put this sum into context, it isn't a great deal more than the £1.3 billion dividend GSK paid to its shareholders on 12 April -- made up of a quarterly dividend of 21p per share, plus a supplemental dividend of 5p.
What's more, GSK's full-year dividend for 2011 came to 70p a share, which amounts to more than £3.5 billion ($5.6 billion). That's more than double what it's currently offering for HGS.
In short, were I a shareholder in HGS (which I'm not, unfortunately), I would politely reject GSK's offer and await developments.
Beware the winner's curse
As a long-term GSK shareholder, today's events make me wonder whether Sir Andrew Witty is getting a little desperate to seal his first big deal since taking GSK's helm in May 2008. After four years in the driving seat, there must be a temptation to overpay in order to win HGS -- a problem that veteran investors know as 'the winner's curse'.
While GSK and Sir Andrew believe that they have "made a full and fair offer which is in the interest of shareholders of both companies", Mr Market disagrees. For now, GSK's offer remains open for a further 20 business days before being reviewed and, possibly, even withdrawn. Were this to happen in the absence of any other competing bids, then HGS's share price would surely dive.
As for GSK shares, they trade at £13.99 as I write, down 25p on yesterday's close. At this price, they trade on a forward price-to-earnings ratio of 11.7 and offer a prospective dividend yield of a chunky 5.2%, covered 1.6 times. Thus, GSK remains a firm buy for me, whether or not it wins control of HGS.
Finally, my advice to Sir Andrew and the GSK board is: lift your offer by 20% to $15.60 a share and then threaten to walk away if it isn't accepted. Otherwise, I suspect that you will end up with egg all over your executive faces!
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> Cliff owns shares in GlaxoSmithKline.