Elliott Gives Glaxo Boss a $46 Billion Challenge

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Elliott Management Corp. is making some easy demands of GlaxoSmithKline Plc. The activist came out with a 17-page analysis including a five-point action plan for the U.K. drugmaker on Thursday. If Glaxo isn’t already getting on with most of it, it should be.

The investment fund’s assessment of the company is that it could be worth 45% more than its current market value — a potentially 33 billion-pound ($46 billion) uplift. That view is more optimistic than even the very the top end of analysts’ targets for the share price. Elliott's explanation for the gulf between current market perception and what could be is Glaxo's weak credibility following strategy flip-flops and poor communication for many years. It won’t find much disagreement there.

Glaxo is now on the right strategic path with the forthcoming split into distinct pharmaceutical and consumer healthcare businesses. The question is how to ensure this strategy is best delivered. Elliott’s primary demand is that Glaxo hire new non-executives with relevant expertise for each business, and that these boards should in turn appoint the right CEO for each one.

Glaxo has already said it will bolster these boards. The twist here is that last step, which puts pressure on Chief Executive Officer Emma Walmsley. Elliott refers to “avoidable mistakes” on her watch, including a failure to cut the dividend and clarify the structure of the planned demerger sooner. The reality is that the separation should prompt a reassessment of leadership as a matter of good governance.

In addition, Elliott is calling for Glaxo management to be held accountable for the targets set out last week at its investor day. That means making bonuses contingent on beating them. Assuming Glaxo has kept something in reserve to give itself room to outperform, that makes sense.

Elliott also wants Glaxo to be open to a full disposal of the consumer business. It would be great for shareholders if an offer turned up. This is not something the company can engineer, but the board certainly shouldn’t obstruct a deal.

Indeed, the main strategic difference between the activist and its target is over the position of the vaccines business. Even this is quite nuanced. Elliott isn’t calling for a sale, as some had expected, and recognizes that this sensitive asset would have to stay U.K.-owned. Instead it says it doesn’t want the business to be integrated too closely, implicitly allowing for a separation later. That goes against the line from Glaxo that the two are increasingly synergistic.

It's ironic that vaccines appears to be a flashpoint. After all, if Glaxo pursued a second demerger, spinning this off from pharma, Walmsley would be a strong candidate to oversee this final breakup given her experience managing the current split.

Glaxo has not fully responded to this first salvo from Elliott. But it may have got off lightly for now. An explanation of why your shares should be substantially higher with some prescriptions which, largely, are what you should be doing anyway is something other activist targets would be glad of. Falling short, though, will surely come with consequences.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

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