(Bloomberg Gadfly) -- GlaxoSmithKline Plc's shareholders have cheered CEO Emma Walmsley for pulling out of the auction for Pfizer Inc.'s consumer health business -- a deal that could have cost $20 billion. She has shown she can stick to the rigid capital allocation framework she set out for the British drugmaker last year. After demonstrating such restraint, maybe she's earned the right to loosen the straitjacket a little.
Rival Reckitt Benckiser Group Plc withdrew from the auction on Wednesday, to similar applause. After that, Walmsley was left in a tricky position. Any deal would had to have been at a knockdown price, which Pfizer may not have accepted. Glaxo shareholders wouldn't have tolerated anything but a bargain when there was no under-bidder.
But the strange turn of events with Pfizer shows buyers are in a strong position for consumer healthcare assets right now. The snag is, shareholders might not see opportunistic M&A of this size as fitting into Glaxo's disciplined framework.
Last year's strategic review wasn't unusual for a new boss: Walmsley wants to simplify and refocus the company. The goal is to revive its pharmaceuticals business. Under her model, this has first call on financial resources. Next comes the need to fund a buyout of Novartis AG's stake in the pair's consumer healthcare joint venture.
After that come dividends and shareholder returns. Finally, there is large-scale M&A.
Walmsley had to look at the Pfizer opportunity. The asset for sale is a high-quality portfolio, including popular painkiller Advil. A purchase would have extended Glaxo's global leadership in consumer healthcare. But with Reckitt previously keen, the risk of overpaying was high.
The situation has changed now. If Pfizer can't find another buyer, and would prefer a deal to an initial public offering, could Glaxo take another crack? A cheap deal would be good for the U.K. firm's shareholders. Consumer health assets generate stable cash flows, making them easy to gear up. An enlarged consumer business would arguably underpin Glaxo's dividend capacity over the longer term. Plus there would be cost-cutting potential.
Alternatively, what about a joint bid with Reckitt? The two sides would need to agree how to carve up the assets -- including who gets Advil. But that would mean a smaller and more affordable deal for both suitors. The recent precedent is the collaboration between the two rival bidders for Spain's Abertis Infraestructuras SA.
The problem for Walmsley is that she may end up being accused of lying if she does something that seems to invert her capital priorities, which look pretty rigid. She'd probably need to forgo some other deals this year. But maybe Glaxo shareholders would benefit if they cut her some slack down the road.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
©2018 Bloomberg L.P.