NVS Novartis AG

THE NEWS: GlaxoSmithKline PLC (GSK.LN) has agreed to pay Novartis AG (NOVN.EB) $13 billion for its 36.5% stake in their consumer health-care joint venture, moving to consolidate the unit just three years after it was created.

MARKET REACTION: Shares in both companies rose on news of the deal. At 1251 GMT, GSK was trading 6.6% higher at GBP13.73 , while Novartis was up 2.5% at CHF76.24.

THE RATIONALE: The deal makes sense for both companies, according to analysts at Bryan Garnier.

From Novartis's perspective, the sale is an opportunity to free up cash to pursue bolt-on acquisitions and fund shareholder returns, while sharpening its focus on its core pharmaceuticals business. Chief Executive Vasant Narasimhan, who started on the job in February, has said he wants to streamline the company's structure and bolster its pipeline of new drugs.

GSK will receive an immediate earnings boost from the acquisition, which will increase its exposure to the consumer health-care business. CEO Emma Walmsley says the deal will give the company more certainty and provide more flexibility to invest in research and development of more lucrative drugs.

VALUE FOR SHAREHOLDERS: GSK's adjusted earnings per share for 2018 could rise by as much as 4% on the acquisition, according to analysts at Jefferies. The deal will also strengthen cash flows, allowing GSK to raise its dividend, A.J Bell says.

However, the sale will have an immediate dilutive effect on Novartis's shares, which analysts at Jefferies expect the company will seek to offset via a buyback program.

WHAT'S NEXT: The transaction is expected to close in the second quarter. At the same time, GSK says it will begin a strategic review of its Horlicks brand and other consumer-nutrition products with a view to raising funds for the purchase.

Looking slightly further ahead, Bryan Garnier expects Novartis to announce the sale of its eye-care business Alcon by the end of the year, while CEO Mr. Narasimhan has said he is considering options for its U.S. generics business.

Write to Nathan Allen at nathan.allen@dowjones.com

(END) Dow Jones Newswires

March 27, 2018 09:09 ET (13:09 GMT)

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