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UPDATE: GSK, Pfizer to combine consumer health divisions in joint venture

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UPDATE: GSK, Pfizer to combine consumer health divisions in joint venture

GlaxoSmithKline PLC and Pfizer Inc. are combining their consumer health businesses in an all-equity deal, a move that will lead to the hiving off of GSK's consumer business in the next three years.

U.K.-based GSK and New York's Pfizer will own 68% and 32% of the joint venture, respectively. The companies' consumer health businesses had combined sales of about £9.8 billion in 2017.

The joint venture — set to become the world's largest consumer health business — will operate under the GSK Consumer Healthcare name, with the exception of GSK's interest in its listed unit in Nigeria which will be excluded from the venture.

Assets within GSK's proposed sale of consumer healthcare nutrition products to Unilever PLC will also be excluded from the joint venture.

The companies said the venture will consist of products in pain relief, respiratory, vitamin and mineral supplements, digestive health, skin health and therapeutic oral health — bringing together household brands such as GSK's Sensodyne, Voltaren and Panadol, and Pfizer's Advil, Centrum and Caltrate.

The deal builds on GSK's previous move to buy out Novartis' stake in GSK Consumer Healthcare, which was originally a joint venture between the two companies. In March, GSK purchased the remaining stake in its Novartis consumer healthcare tieup for $13 billion, after walking away from a bid for Pfizer's similar unit.

GSK expects the transaction to be accretive to total earnings in the second full year following the deal's closing, and to adjusted earnings and free cash flow in the first full year after closing. The company expects total annual costs savings of about £500 million by 2022 as a result of the transaction.

Pfizer said the deal is expected to bring about $650 million in peak cost synergies and is anticipated to be slightly accretive for the company in each of the first three years after deal closing.

Both companies' boards have unanimously approved the transaction, which is expected to close in the second half of 2019.

The agreement is still subject to approval by GSK shareholders and antitrust regulators. The U.K. drugmaker's board plans to recommend that shareholders vote in favor of the deal.

GSK CEO Emma Walmsley said the deal presents a pathway for the drugmaker to create a new global pharmaceuticals and vaccines company and a new consumer health company. "Ultimately, our goal is to create two exceptional, U.K.-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," she said in a news release.

Meanwhile, Pfizer's COO and incoming CEO, Albert Bourla, said the combination of the businesses will be broader and more sustainable than either company individually. "We believe that this joint venture is a great opportunity to ensure the future success of Pfizer Consumer Healthcare while unlocking meaningful after-tax value for Pfizer shareholders," Bourla said in a separate Pfizer news release.

GSK confirms that it still expects to pay dividends of 80 pence per share in 2018, and anticipates to pay dividends of the same amount in 2019.

Post-closing plans

Within three years of closing the deal, GSK plans to separate the joint venture through a demerger of its equity interest and a listing of GSK Consumer Healthcare on the U.K. market. GSK will also have the right to decide whether to start a separation and listing for a period of five years from the deal's closing.

Pfizer plans to deconsolidate Pfizer Consumer Healthcare from its financial statements when the deal closes. The deconsolidation is not expected to have any material impact on the drugmaker's top-line.

Until separation, the joint venture will be consolidated in GSK's financial statements.

GSK's Walmsley will be chair of the venture. GSK Consumer Healthcare CEO Brian McNamara and CFO Tobias Hestler will take on the same roles at the joint venture.

Pfizer will have the right to appoint three out of the nine members of the venture's board.

The U.K.-based drugmaker agreed to pay $900 million as a break free if the company's board changes, withdraws or qualifies its recommendation, if shareholders vote on the proposed deal and do not approve it and if the shareholders do not approve the transaction by Sept. 30.

Citi served as lead adviser to GSK on the transaction, while J. P. Morgan Cazenove and Greenhill & Co. acted as advisers. Slaughter and May, and Kirkland & Ellis LLP provided legal advice.

Centerview Partners LLC, Guggenheim Securities LLC and Morgan Stanley & Co. LLC served as Pfizer’s financial advisers, while Wachtell Lipton Rosen & Katz and Clifford Chance LLP served as legal advisers. Skadden Arps Slate Meagher & Flom LLP served as Pfizer's tax adviser.