Business Context and Reporting Period
Company: GlaxoSmithKline plc (GSK)
Filing Type: Form 6-K (Report of Foreign Issuer)
Date: April 13, 2018
Subject: Proposed buyout of Novartis AG's 36.5% interest in the GlaxoSmithKline Consumer Healthcare Holdings Limited Joint Venture (JV).
Context: GSK seeks shareholder approval to acquire full ownership of the Consumer Healthcare JV, which holds category-leading positions in Wellness, Oral Health, and Skin Health. The transaction is structured as a related party transaction under UK Listing Rules.
Key Financial Metrics
Transaction Consideration: $13 billion (subject to post-completion true-up for cash generated).
Financing: Funded via new debt facilities ($8 billion USD and £3.5 billion GBP) and/or available cash resources. Credit ratings (S&P, Moody's) are expected to remain unchanged.
Break Fee: $200 million payable to Novartis if the transaction fails due to shareholder rejection, board recommendation withdrawal, or lack of a vote by August 31, 2018.
| Metric | 2017 (£m) | 2016 (£m) | Growth (AER) | Growth (CER) |
|---|---|---|---|---|
| Consumer Healthcare JV Turnover | 7,003 | 6,530 | 7% | 2% |
| Adjusted Operating Profit | 1,354 | 1,100 | 23% | 11% |
| Adjusted Operating Margin | 19.3% | 16.8% | - | - |
| Total Profit After Tax | 1,211 | 660 | 83% | 67% |
| Non-Controlling Interest (Earnings) | 415 | 203 | - | - |
| Dividends to Novartis | 420 | 346 | - | - |
Note: 2017 Profit After Tax includes a £483 million accounting credit from Swiss tax reform.
Material Changes and Strategic Rationale
- Ownership Change: GSK will increase its stake in the Consumer Healthcare JV from 63.5% to 100%, eliminating the non-controlling interest.
- Liability Extinguishment: The transaction will extinguish the liability associated with the JV Put Option (valued at £8,606 million as of Dec 31, 2017) and the non-controlling interest (£3,631 million).
- Performance: The JV delivered 7% turnover growth (AER) and 23% adjusted operating profit growth (AER) in 2017. Cost savings of £400 million targeted in 2015 have been delivered ahead of schedule.
- Strategic Review: GSK is initiating a strategic review of Horlicks and other nutrition products (approx. £550 million sales in 2017) to potentially support funding and refocus on OTC and Oral Health.
Guidance, Outlook, and Risks
Financial Outlook:
- The transaction is expected to be immediately accretive to Total Earnings and Adjusted Earnings in 2018 and thereafter.
- Free cash flow is expected to strengthen due to the retention of dividends previously paid to Novartis.
- Margin Targets: GSK targets a Consumer Healthcare Segment Operating Profit Margin of 20%+ by 2020 (2015 CER) and approaching the mid-20% range by 2022 (2017 CER).
- Dividend Policy: No change; GSK expects to pay a dividend of 80 pence per Ordinary Share for 2018.
Risks and Contingencies:
- Shareholder Approval: Completion is conditional on shareholder approval at the General Meeting on May 3, 2018.
- Increased Leverage: The transaction will increase GSK's financial leverage and debt service obligations.
- Currency Risk: Exposure to USD/GBP exchange rate fluctuations on the $13 billion consideration.
- Put Option Reinstatement: If the transaction fails, the JV Put Option remains exercisable by Novartis until March 2, 2035, creating future valuation uncertainty.
Key Facts for Investor Verification
- Voting Deadline: Proxy forms must be received by 3:30 p.m. on Tuesday, May 1, 2018.
- Expected Completion: June 1, 2018, subject to conditions.
- Valuation Consistency: The $13 billion price is within 3% of the undiscounted valuation of the JV Put Option liability in GSK's most recent audited balance sheet.
- Related Party Status: Novartis is a related party; the transaction requires shareholder approval under Listing Rules, unlike a standard exercise of the Put Option.
- Break Fee Conditions: The $200 million fee is payable if shareholders reject the deal, the board withdraws its recommendation, or no vote is held by August 31, 2018.