Elliott Management has built a large stake in GlaxoSmithKline

I have been buying GlaxoSmithKline stock ahead of the proposed split. An activist hedge fund taking a large stake in the company suggests they want something different. Here is what I am doing now.

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According to the Financial Times, activist hedge fund Elliott Management has built a multibillion-pound stake in GlaxoSmithKline (LSE:GSK). The news broke today, and the GlaxoSmithKline share price is up 4.3% at the time of writing. Given that the broader FTSE 100 is up only 0.58%, and other large-cap pharma stock prices have budged only slightly, it’s reasonable to assume that Glaxo shareholders have taken the news well.

Activist hedge fund target

Elliott Management — which is headed up by billionaire investor Paul Singer — has a history of taking large stakes in companies that it feels are underperforming. It then uses its influence as a large shareholder to push the board to make changes that it thinks will increase shareholder value.

The GlaxoSmithKline share price has been underperforming its peers. It is down a little under 20% over three years. In contrast, the share prices of AstraZeneca and Pfizer, two notable peers, are up around 60% and 20%, respectively. Therefore, GlaxoSmithKline becoming the target of an activist hedge fund like Elliott Management is not a big surprise.

What is surprising is that major changes are already underway at GlaxoSmithKline. Investors have argued for years that the GlaxoSmithKline share price would do better if the company were to split. Investors calling for such a change are getting what they wanted.

What is Elliott Management after?

GlaxoSmithKline is due to split in 2022. The cash cow consumer healthcare business will go it alone with higher leverage and probably pay a stable dividend. The riskier biopharma business, dubbed ‘New Glaxo’, should emerge with lower debt and be able to invest heavily in a pipeline of new drugs.

GlaxoSmithKline told its shareholders about this plan over a year ago. Today’s announcement that Elliott Management has built a large stake suggests it is unhappy with the plan in part or in full. There is concern that the current CEO of GlaxoSmithKline, who previously has a successful tenure at personal care company L’Oréal, plans to head up the biopharma business after the split. The consumer healthcare division is thought to be better suited to the current CEO’s skill set.

It’s worth noting that GlaxoSmithKline has issued a dividend warning. After the split, the aggregate dividend is likely to be lower than the 80p paid for 2019. Perhaps this could be reason enough for Elliott to lobby against the company considering a lower payout.

It has also been suggested that GlaxoSmithKline’s sluggishness in developing a coronavirus vaccine, given its vaccine business is the jewel in its crown, is a motivating factor apart from the split. It’s worth noting that GlaxoSmithKline is collaborating on at least two Covid-19 vaccines at present.

GlaxoSmithKline share price

Without knowing what Elliott management wants, it’s impossible to speculate on the long-term effects of the activist hedge fund’s involvement on the GlaxoSmithKline share price. I am in favour of the split. Naturally, I would rather Elliott did not derail it. But, I can see the merits of arguing for the CEO to move to control the consumer healthcare business. As for vaccines, playing the long game might have been a shrewd move. Rolling vaccines out in record time have caused difficulties for others. It looks like Covid-19 will require multiple vaccines for quite some time.

Until I know more, I am continuing to buy GlaxoSmithKline shares ahead of the anticipated split.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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