GSK's $13 Billion Novartis Deal Is Only Just the Start

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(Bloomberg Gadfly) -- GlaxoSmithKline Plc's new-ish CEO is proving to be an adroit negotiator. On Tuesday, Emma Walmsley agreed to pay $13 billion for Novartis AG's stake in the companies' consumer healthcare joint venture, which owns brands like Sensodyne toothpaste and Nicorette nicotine patches.

It isn't a cheap deal, but the lofty valuation looks justified.

Novartis gained the right to force a purchase of its 37 percent holding at the beginning of this month. Glaxo has pre-empted that by negotiating a purchase for a little more than the 8.6 billion pounds ($12 billion) value it ascribed to the holding in its last results. The price is a punchy 18 times trailing operating profit.

This was set, Glaxo says, with reference to other comparable listed firms. The snag is there aren't really any big publicly traded companies that look similar. The likes of Colgate-Palmolive Co. and Reckitt Benckiser Group Plc come close, although they trade on just over 16 times trailing operating profit.

Still, there's no doubt this is a premium asset. Paying up to get the deal done makes sense for Glaxo, while Novartis was wise to take the chance to exit on good terms. Glaxo gets full ownership of the venture's cash flows this year, and removes the uncertainty caused by Novartis's option.

Investors in both companies were relieved. Glaxo's shareholders seem especially pleased, probably because they reckon the Novartis transaction precludes acquiring the consumer business of Pfizer Inc. -- a deal mooted to cost as much as $20 billion.

Could Glaxo still do both? There is financial and strategic logic to do a deal with Pfizer at the right price. The Novartis buyout will boost Glaxo's cash flow as the incremental cash boost will exceed its financing cost. The same would be true of a deal for all or part of Pfizer's consumer portfolio.

To ease the strain of the Novartis buyout, Glaxo has put up for sale some consumer businesses like Horlicks, worth perhaps 1.5 billion pounds. The drugmaker is also reviewing its 72 percent stake in its listed Indian consumer healthcare subsidiary, valued at about 2.2 billion pounds. Disposals here could cut Glaxo's net debt to Ebitda to less than twice Ebitda. That is a nice place to be.

Glaxo looks like it will go into the second half of the year with some flexibility. If it was willing to let leverage shoot up, it could conceivably have another crack at the Pfizer unit. Or it could buy more drugs for its pharmaceuticals business.

Walmsley isn't under any pressure right now. She has got Novartis off her back. The Pfizer consumer business hasn't gone to a rival just yet. Her options are increasing. She may, this year, want to test what investors will let her get away with.

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.

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