GSK to buy-out Novartis’ stake in consumer health JV

The UK drugmaker said it is buying Novartis’ 36.5-percent stake in the JV for $13 billion, securing full control of the business, which was established as part of a three-part transaction between GSK and Novartis approved by shareholders in 2014.

Under the terms of the original deal, Novartis holds the right, exercisable from 2 March 2018 to 2 March 2035, to require GSK to purchase its stake (or specified tranches of it) in the JV.

GSK said this option posed inherent uncertainty for its capital planning, and thus the move to take ownership at this point removes uncertainty and improves its ability to plan allocation of capital to other priorities.

Also, the deal will allow shareholders to capture the full value of GSK’s Consumer Healthcare growth, the firm noted. "With category-leading Power Brands, increased focus on science-based innovation and improved operational efficiencies, GSK Consumer Healthcare is well positioned to deliver sales growth, operating margin improvements and attractive returns," it said.

The transaction is expected to be accretive to adjusted earnings in 2018 and thereafter, and is expected to strengthen operational cash flows.

Commenting on the deal, Andy Smith, analyst at Edison Investment Research, said: "GSK had a choice between acquiring the portion of the captive Consumer Healthcare JV with Novartis that it didn't already own, or acquiring the larger Consumer division, and cutting the dividend.

"With a net debt/EBITDA ratio of about 2, the dividend is probably safe with just one Consumer acquisition and the choice of which one to acquire might have been more related to the divestment of overlaps that would have been mandated by the FTC and EU, rather than the price.

"Arguably, with free cash flows from the enlarged Consumer division in place, and fewer synergies to have to realise than would have been the case with the Pfizer transaction, the dividend could be seen to be less fragile."

Emma Walmsley, GSK’s chief executive, said: "For the Group, the transaction is expected to benefit adjusted earnings and cash flows, helping us accelerate efforts to improve performance. Most importantly it also removes uncertainty and allows us to plan use of our capital for other priorities, especially pharmaceuticals R&D."

GSK also said it would initiate a strategic review of Horlicks and its other consumer healthcare nutrition products to support funding of the transaction, and to drive increased focus on OTC and Oral Health categories. Together these products generated sales of around £550 million in 2017.

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