Glaxo's Breakup Will Be Painful

The Week: Morningstar columnist Rodney Hobson wonders whether the dismantling of GlaxoSmithKline, the most expensive breakup in corporate history, is a wise move

Rodney Hobson 7 February, 2020 | 9:36AM
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You know you are getting old when you read the wonderful news about the breakup of a top-heavy group and you fondly remember how wonderful it was when it was put together. Smith and Kline were stronger combined as a pharmaceutical company; then it was “Hark the herald angels sing, Beecham’s pills are a very good thing” and Smithkline Beecham was born; then “Glaxo” was brought into the mix and the Beecham name could be consigned to history.

Now, apparently, it is worth spending £2.4 billion on breaking up GlaxoSmithKline (GSK). The latest triumph of activist investors over the needs of ordinary shareholders was mooted a year ago but only now do we discover that this madness will be one of the most expensive breakups in corporate history. How does this make financial sense?

I feel particularly bitter because I am a GSK shareholder and I’ve already suffered in another great breakup idea by activist investors, splitting Costa Coffee off from Whitbread (WTB), a move that brought a one-off gain and long-term pain.

The breakup bill at GSK went down badly, knocking 75p, or 4% off the share price and overshadowing results that were not great but they weren’t bad either.

Sales in 2019 rose 10% and adjusted earnings per share 4%. Free cash flow was an impressive £5.1 billion. The downside was a forecast that earnings per share will slip by 1-4% in 2020. However, Glaxo expects to pay dividends of 80p again this year, as it did in 2019.

Glaxo, like all large pharmaceutical companies, is a complex business, which is good in that one bad performer among the portfolio can be offset by the other parts of the business. However, I do think that the shares had run away too far, rising from £15 last February to a peak of £18.50 last month. They were down to £17.40 after the results, giving a decent yield of 4.6%. I’m happy to hold for the long term. Just not as happy as I would have been if activist investors hadn’t interfered.

Domino’s Ditching Scandinavia

In contrast, Domino’s Pizza (DOM), whose shares I also hold, rose 4% on a trading update showing group sales up 3.7%. The picture would have been better but for a slippage in sales outside the home base of the UK and Republic of Ireland, where the gain was 4.4% despite intense competition and strong comparatives in the corresponding quarter a year earlier.

Domino’s is example of how riproaring success at home can come to a shuddering halt when management attention is diverted to wider horizons. It is, mercifully, attempting to dispose of overseas operations in Scandinavia, Iceland and Switzerland. You don’t need an activist investor to see the sense in getting rid of parts of the business that are never going to make good.

Not surprisingly, no single bidder wants to take on the lot, so Domino’s is rightly concentrating on the main problem area of Norway. Any disposals will depress sales in the short term but boost profits over the longer term. This is one withdrawal from Europe that we can all agree on.

The shares had a great run from 220p in mid-August to a peak of 325p at year end but they had already come off the boil before the update, twice retreating back below 300p. They now stand at 306p.

I can’t see them racing away until at least Norway is off the Domino’s map. However, I believe the floor just below 300p will continue to hold.


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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Domino's Pizza Group PLC351.60 GBX-4.25
GSK PLC1,672.40 GBX0.22Rating
Whitbread PLC3,509.00 GBX-0.93

About Author

Rodney Hobson

Rodney Hobson  is a columnist for and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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