GlaxoSmithKline: Nigerian complications

GlaxoSmithKline is pulling a fast one in Nigeria. As it is engulfed by an alleged bribery scandal in China, the pharmaceuticals group is suddenly finding the going tough in another core emerging market, one where it has operated for decades.

GSK wants to raise its stake in GSK Consumer Nigeria, its consumer healthcare business there, from 46 per cent to 75 per cent. But what should have been a straightforward transaction is running into unexpectedly fierce minority shareholder opposition.

GSK has offered to buy the additional stake from other investors for 48 naira (about $0.30) a share; a “scheme of arrangement” has been set up to that effect. The deadline for acceptance is July 23. The deal is important for GSK, which wants to take greater control of international subsidiaries. The sums are also small. GSK Nigeria has a market capitalisation of $320m; increasing its stake should cost no more than $100m. Which is where GSK’s problems start.

One complaint is that GSK is wrapping the transaction up too neatly by voting its stake in favour – something it could not do under UK takeover rules. That may be a bit unfair; the transaction is being done under Nigerian market rules, and it is hardly up to GSK to point out that they may be inadequate.

The more serious objection is GSK’s miserly offer price. It was set last November, and was at that time a 28 per cent premium to GSK Nigeria’s share price. That premium has now vanished: Nigerian stocks are up 25 per cent since then, and GSK Nigeria’s shares are trading at 55 naira. The offer price values GSK Nigeria at 16 times its 2012 earnings. True, two-thirds of GSK Nigeria’s revenue comes from sales of Ribena and Lucozade, which GSK globally is selling, so there may be a valuation risk attached. But other Lagos-listed subsidiaries of consumer goods companies – Nestlé Nigeria, Guinness Nigeria – trade at 25 to 40 times.

The fact is that GSK Nigeria’s board has secured a poor deal for minority shareholders; it clearly caved in too quickly when big brother in London came calling. This deal should be a template for the treatment of minority investors. It is not too late for the GSK Nigeria board to stand up and be counted.

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