GSK/Elliott Management: seeking a tonic for moribund shares

Long-suffering value investors awaiting cheap stocks to regain favour have enjoyed some relief. But, as GlaxoSmithKline’s performance has shown, cheap can stay so without a catalyst. Unhappy with GSK’s persistently sluggish shares, Elliott Management aims to inject some tonic into the hide of the UK drugmaker. The Financial Times reported on Thursday that the activist hedge fund has built up a multibillion-pound stake in GSK.

One wonders what change is sought. Whereas most activists demand some form of corporate divestments or restructuring, its chief executive Dame Emma Walmsley already has this in train. A long-planned spinout of GSK’s consumer health business should come in the next year or so, leaving a biopharma core behind. And, if successful, a sale should raise a lot of money. Even on a relatively modest multiple of 12 times last year’s consumer healthcare ebitda of roughly £2.5bn, the unit is worth £30bn, or £6 per GSK share. Yet GSK’s market value seemingly attributes little value to it or the pharma pipeline, thinks Berenberg.

Instead, Elliott’s focus may be on what GSK will look like as a biopharma. Walmsley’s appointment four years ago raised some eyebrows, given her lack of scientific credentials, having joined from L’Oréal in 2010. Early in her tenure, Walmsley said she did not wish GSK to drift off into “hobbyland”, developing drugs without obvious commercial potential. But there has been little to show so far. Since her elevation, GSK’s shares — adding in dividends — have moved sideways.

Other shareholders fret about more mundane issues. Holders of GSK have grown accustomed to a hefty 6 per cent dividend yield. On a typical 50 per cent payout for global biopharma companies, holders of this unit could see their incomes slashed by 40 per cent. If shareholders want blockbusters, they must be willing to sacrifice dividends for investment.

News of Elliott’s intervention has revived GSK’s sickly shares, up 5 per cent on the day. If this refocuses attention on the latent value within GSK, that is good news.

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