The last time I wrote about a potential takeover of GlaxoSmithKline (LSE: GSK), back in November 2015, I concluded that while predators may be circling, the company’s price tag would probably put buyers off.
One year on and a lot has changed, both inside and outside Glaxo. For a start, 2016 has been a bumper year for the company with organic sales and earnings growth surpassing expectations. The company has also chosen a new chief executive to succeed Sir Andrew Witty and rebuffed calls from notable investors for it to be broken up.
Meanwhile, outside of Glaxo’s head office the world has changed significantly. Brexit has sent the value of the pound plunge, and dented the UK’s reputation of being a safe and stable place to do business. There has also been some protectionist rhetoric from the government, which has promised to scrutinise any large buyouts of British companies involving overseas buyers.
Changing playing field
The environment hasn’t just changed in Britain. Many US pharmaceutical companies have surprised investors this year by warning that revenues, which were previously protected by price increases and patents, are now likely to come in below expectations, as firms come under pressure to reduce or slow down price hikes and patents continue to expiring.
All of these developments lead me to believe that a bid for Glaxo is now more likely than it was this time last year.
Why do I feel that this is now the case? Well, for a start, after the fall in the value of the pound, Glaxo is 23% cheaper to international suitors. For example, at exchange rates this time last year the company’s market capitalisation would be $114bn. But based on today’s pound-to-dollar exchange rate, the company’s market capitalisation is down to $93bn. With such a huge saving available, any potential suitor could offer a larger premium to win over shareholders.
Secondly, as other global pharmaceutical firms struggle to find growth, Glaxo is one of the few companies in the sector still growing, thanks to its pipeline of products under development and diversification into other markets such as consumer healthcare. Thanks to both sterling’s depreciation and sales growth, City analysts expect the company’s earnings per share to grow 31% this year to 99p. Revenue growth is expected to come in at 14% and next year analysts have pencilled in earnings per share growth of 9%. Many other pharmaceutical companies have warned on growth this year, so Glaxo’s projected growth rate puts the company in an elite club.
The bottom line
Overall, Glaxo now looks more attractive as a bid target than it did this time last year. However, as I said this time last year, there is no guarantee a bid will emerge for the company.
Nonetheless, whether an offer emerges for the company or not, Glaxo’s defensive nature, robust cash flows and impressive dividend yield (currently 5.8%) makes the company the perfect long-term buy and forget share.
