Wellcome Trust backs Glaxo bid

Glaxo, the UK's largest drugs company, yesterday signalled a new takeover boom in the City by launching an £8.9bn hostile bid for Wellcome, its UK rival. The Wellcome board gave the offer a frosty response, neither accepting not rejecting it. But Wellcome appears to have been finessed because Glaxo has won the conditional acceptance of its largest shareholder, the Wellcome Trust, which has 39.5 per cent.

John Robb, Wellcome's chief executive, was told yesterday by Sir Richard Sykes, Glaxo's chairman, that the Trust had been sewn up with an agreement late the night before that gives shareholders a 49.5 per cent premium to Friday's closing price of Wellcome shares.

If the Trust's acceptance becomes unconditional - it has until Thursday night to change its mind, and then the High Court must approve - it would deliver a knock-out blow to Wellcome, which is best known for Zovirax, the anti-herpes drug and Retrovir,which helps combat HIV.

If the deal goes through it will prove a bonanza not just for Wellcome shareholders but for City advisers and the Wellcome directors. Fees for banking, broking and legal advice are likely to reach around £140m, more than the City earned out of all takeovers last year.

The directors of Wellcome would also have a consolation prize - yesterday saw the value of their options and ordinary shareholdings in the company rise by a total of £3.5m on the back of the Glaxo bid.

The deal has to be cleared on monopolies grounds by the Office of Fair Trading and the European Commission, but Sir Richard said he had been advised there was no concern on competition grounds.

But there is bound to be controversy because Sir Richard's rationalisation plans could threaten Wellcome research laboratories at Dartford and Beckenham in Kent and lead to thousands of job losses.

The Wellcome board issued a short statement after an emergency meeting advising shareholders to take no action. It said that the bid was unsolicited and the board was considering itsoptions. Glaxo has said it will only increase its offer if a rival bidder emerges. City analysts say a rival bid is unlikely.

However, the purchase of the Trust's key stake has yet to overcome several stumbling blocks. One is the 1992 memorandum of understanding signed by the Trust and the Wellcome Foundation, which states that the Trust will maintain a long-term shareholding of at least 25 per cent. The agreement is not legally binding but one adviser said that it was "a bit silly" for the Trust to have reached an agreement with a hostile bidder without consulting the Wellcome board.

Glaxo's £8.9bn offer values each Wellcome share at 1025p, compared with the share price of 688p at Friday's close. The offer is for £722 in cash and 47 new Glaxo shares for every 100 Wellcome shares. Wellcome shares soared 273p to 961p. Glaxo's shares fell 44.5p to 599p. Glaxo plans to fund the deal through a combination of cash and bank borrowings.

If successful the deal would create the world's largest drugs group under a new name - Glaxo Wellcome. Glaxo, which makes the Zantac anti-ulcer drug which accounts for 45 per cent of sales, is currently neck and neck with Merck, the US group, for leadership of the world's highly fragmented pharmaceuticals market. Glaxo claims to have nudged ahead, because of dollar movements.

Both have a market share of around 3.9 per cent, with Wellcome ranked 20th with 1.4 per cent. It would also create Britain's largest company with a market capitalisation of more than £28bn.

Glaxo has not made an acquisition since 1977. The former chairman, Sir Paul Girolami, was a firm opponent of takeovers. But he stepped down from the chair late last year.

Explaining the rationale for the bid Sir Richard Sykes said the pace of change in the drugs market meant Glaxo could no longer stand on the sidelines. Squeezed by lower prices and regulatory changes the drugs companies are also up against pharmacy benefit managers (PBMs), big buying groups which supply hospitals with drugs from a number of manufacturers and use their buying muscle to achieve keen prices from the drugs groups.

The changes have sparked a merger frenzy between some of the world's largest drugs groups.

It is know that Glaxo considered buying a PBM but decided against it. Sir Richard said: "We looked at that when it was fashionable but decided against it." He said there were too many drugs companies duplicating too many functions. He pointed out that this was an industry where the market leader only held a 3.9 per cent share.

On the Wellcome bid he said: "We looked at it for quite some time. We believe it will be manageable to integrate this business with our own. Anyone bigger than Wellcome would be difficult."

Last year Glaxo achieved pre-tax profits of £1.8bn on sales of £5.56bn. Wellcome posted profits of £667m on sales of £2.04bn.

Although Sir Richard did his best to paint a rosy picture of the strategic logic of the deal, it s clear that there will be radical cost-cutting. Glaxo has 45,000 employees and Wellcome has 17,000 - there are certain to be significant job losses. Research is another area where the axe may fall. Glaxo recently opened a £710m research centre in Stevenage, and has spare capacity there.

In the City, the deal was greeted with approval though most saw itas an exercise in cost- cutting rather than strategic vision. One analyst said: "Initially I was surprised but having looked at it I'm pretty encouraged. It's a consolidating industry withtoo much capital in it. Wellcome was never recognised as a leading marketing organisation whereas Glaxo is."

Another said that the deal was a short-term way of adding a chunk of sales and cutting out costs. He added that Glaxo had not been performing brilliantly recently. Its interim results in February are expected to be poor, with sales of Zantacdeclining.

Excluding the four directors who own none or small amounts of shares, the remainingdirectors made an average of £390,000 a head yesterday. The figures for directors' shareholdings are taken from thecompany accounts, for the year ended August 1993. The biggest winner is Mr Robb; he makes a massive £722,000 paper profit on the 250,000 options and 13,750 ordinary shares he holds.