GlaxoSmithKline transaction with Novartis

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

Glaxo announced yesterday three major transactions with Novartis:

 

1. GSK and Novartis will create a new world-leading Consumer Healthcare business with 2013 pro forma revenues of £6.5bn.  GSK will have majority control with an equity interest of 63.5%.
2. GSK will acquire Novartis' global Vaccines business (excluding influenza vaccines) for an initial cash consideration of $5.25bn with subsequent potential milestone payments of up to $1.8bn and ongoing royalties.
3. GSK will divest its marketed Oncology portfolio, related R&D activities and rights to its AKT inhibitor and also grant of commercialisation partner rights for future oncology products to Novartis for an aggregate cash consideration of $16bn (of which up to $1.5bn depends on the results of the COMBI-d trial).

 

As a result of theses transactions GSK shareholders will receive a return of £4bn capital.

 

GSK mention that the transaction is expected to be accretive to core EPS from first year and is expected to complete during the first half of 2015.  Management also state that the proposed transactions would increase their annual revenues by £1.3bn to £26.9bn on a 2013 pro forma basis.

 

This looks to be a good deal for GSK, who after the transaction will have 70% of sales focused on the four key areas of: Respiratory, HIV (ViiV Healthcare), Vaccines and Consumer Healthcare.  GSK have a further 14% of sales that relate to older mature products that currently are undergoing a strategic review, so I would expect further divestments over the next 12 months.

 

The return of capital (ROC) is likely to follow the format of previous examples this year (i.e. VOD; MRO; IMI) and shareholders should have the choice of either receiving the ROC as income or capital, with a share consolidation so as not to affect the share price.

 

As an example this may take the form of a ROC of 82p for every share held and a consolidation that replaces every 20 shares with 19 shares. 

 

So an investor holding 10,000 shares worth £164,000 would receive £8,200 of cash (as income or capital depending on his tax position) and his 10,000 shares would become 9,500 shares - worth £155,800 (i.e. £164,000 less the ROC of £82,00).

 

The share price both before and after consolidation is 1640p.