Glaxo in pole as Reckitt bails on Pfizer deal

Dividends in the FTSE 100 (UKX) Index don’t get much better than those at GlaxoSmithKline (GSK), which is why income investors are somewhat alarmed at the prospect of a multi-billion pound deal involving the pharma giant.

Those worries grew a little louder today after Reckitt Benckiser (RB.) said it was no longer interested in Pfizer (PFE)’s £12 billion-rated consumer healthcare business.

This reportedly leaves GlaxoSmithKline as the only bidder in an auction process that offers the prize of owning two of the top 10 global over-the-counter brands in the shape of Advil pain relief and Centrum multi-vitamins.

The addition of this business would certainly play to Glaxo and CEO Emma Walmsley’s strengths, given that she was the boss of its Sensodyne and Panadol division before taking the top job from Andrew Witty in April 2017.

Consumer healthcare is highly cash generative, but that’s not stopped investors fearing that a deal could jeopardise Glaxo’s attractive dividend, which has consistently paid 80p since 2015 and yielded in the region of 6%.

Walmsley has stressed that shareholder returns take priority over big M&A deals, with the company continuing to expect the payment of another 80p dividend in relation to this financial year.

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Even so, shares continue to struggle as a result of the uncertainty. They are down 22% since Walmsley took the helm, leaving the company similar in market value to UK-listed rival AstraZeneca (AZN).

There are other major decisions for Walmsley to take as Glaxo must come to terms with generic competition facing its respiratory business in particular.

Replenishing the drugs pipeline with new blockbuster products is an absolute priority, with Walmsley set to give an update on progress during the second quarter. Finding cash for extra spending could be another potential dividend threat if Walmsley goes all out on boosting long-term growth.

Bolstering the consumer healthcare division brings the potential for hefty synergies and exposure to an attractive marketplace.

Demand for consumer healthcare products is growing, particularly in emerging markets and as rising healthcare costs and ageing populations mean people are having to take an increasingly active role in managing their own health.

Glaxo’s consumer healthcare business, which is a joint venture with Novartis, generated sales of £7.8 billon in 2017 and accounts for a quarter of group turnover.

It’s possible, of course, that a shortage of bidders will prompt Pfizer to retain its consumer healthcare division. Reckitt said it pulled out of the race today because it only wanted parts of the business, which is most likely to have been Advil.

Chief executive Rakesh Kapoor plans instead to focus on integrating the recent $17 billion acquisition of the baby formula business Mead Johnson and bedding in Reckitt’s two new business units – Health and Hygiene Home.

Having stayed tight-lipped on his Pfizer interest until today, Kapoor said: “We always approach inorganic growth opportunities in a rigorous, disciplined, and financially responsible manner to ensure long term value creation for shareholders.

“An acquisition for the whole Pfizer consumer health business did not fit our acquisition criteria and an acquisition of part of the business was not possible.”

Investors welcomed the decision as shares rallied more than 5% today.

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