Looking at the FTSE 100 today, healthcare giant GlaxoSmithKline (LSE: GSK) is clearly the top performer. Its shares are up 7.6% as I write, versus a rise of 0.9% for the index. According to Thomson Reuters, this is the single largest gain in the price in nine years. So what’s the driver of the price surge?
Consumer healthcare joint venture
The reason GSK shares are flying today is that the company has announced that it has reached an agreement with Pfizer to combine their consumer health businesses into a new ‘world-leading’ joint venture that will have combined sales of nearly £10bn. Glaxo will have a majority controlling equity interest of 68%, while Pfizer will have the remaining 32%.
The combination will bring together two highly-complementary portfolios of trusted consumer health brands, including GSK’s Sensodyne, Voltaren and Panadol, and Pfizer’s Advil, Centrum and Caltrate, the the JV to be the global leader in over-the-counter (OTC) products via a market share of 7.3%, according to the company.
GSK believes that the operation will be well positioned to deliver stronger sales, cash flow, and earnings growth and generate substantial cost synergies, and has said that it expects the proposed transaction to be accretive to adjusted earnings and free cash flow in the first full year after closing.
Demerger
Furthermore, given that the proposed transaction is “transformational” to the scale of its Consumer Healthcare business, Glaxo has advised that it plans to separate the JV via a demerger, and list GSK Consumer Healthcare on the stock market separately within three years of closing the transaction. “Ultimately, our goal is to create two exceptional, UK-based global companies, with appropriate capital structures, that are each well positioned to deliver improving returns to shareholders and significant benefits to patients and consumers,” said CEO Emma Walmsley.
Dividend
In other important news this morning, GSK said that it remains committed to its current dividend policy and that it expects to pay dividends of 80p per share both this year and next. The company also stated that it believes it will be well placed to deliver returns to shareholders, as well as invest in its strategic priorities going forward.
Thoughts on the deal
My thoughts on this news? I think the deal is a positive development. The joint venture means that GSK will become the OTC market leader in categories such as pain relief, digestive health, and therapeutic oral health across almost all major geographies in the world, and this should help generate significant cost savings that can be reinvested in the business.
The demerger should also create a business that is capable of generating relatively stable revenues and cash flows, which is another plus. Jefferies analyst Peter Welford points out that the consumer healthcare division could potentially support higher debt levels and as a result, this could ‘deleverage’ the pharma and vaccines business.
As a dividend investor, I also like the news that the dividend will be maintained this year and next. At the current share price, the stock supports a yield of 5.2%.
Are the shares a ‘buy’ right now? With analysts expecting GSK to generate earnings per share of 114p for FY2018, the shares currently trade on a P/E ratio of 13.5. I think that’s a reasonable price to pay for a slice of the business.
