gamesinvestor
28 Mar 2018
Re: GSK deal - broker soundbites Jack, I would have thought the spike in the price today has more to do with big pharma being in sympathy with the muted bid for Shire today, seemingly making the punters look favourably on the sector for at least - well 10 minutes at a time maybe.HSBC probably don't know their arxe from their elbow, so I would put the accuracy of their target as close as a 50% swing either way.Games - I mean even AZN with the crazy Frenchy running it is up 1.61% lol !!
Jack_Walsh
28 Mar 2018
Re: GSK deal - broker soundbites I see that HSBC has upgrading their view to £20.30, which is a pretty punchy +50%.Seems that they are pretty bullish.
Bill1703
28 Mar 2018
Re: Making a Horlicks of it..... "I'm probably in a minority, but selling the family silver to maintain an SP related bonus might not look too bright in a few years time unless a new blockbuster comes on line. "Well, since Lupo asks.... Not so sure about "family silver" - and ultimately, clinging onto a few tarnished family heirlooms mouldering away in the cabinet isn't going to butter any parsnips. Or something like that?If possible, it's a view IMHO that risks erring, at the same time, to both what Uncle Vince might call irrational nostalgia, for a past which was never the idyll that some like to recall, and a modern-day cynicism over the motives of PLC directors. No reason I can see to suspect that it's anything more sinister than what they present, a bit more headroom in the balance sheet for higher priority investment for longer term growth... and bedsides, I don't see much problem with SP-related bonus schemes, as long as such are suitably long-term and relatively demanding in horizon and hurdle-rate.Hiving off Horlicks has been speculated for a while now, and probably for good reason - it's hard to see how it sits with a progressive Consumer Health portfolio on the basis that, er, it really ain't that healthy... however much our pre-War forebears may have believed. The Indians may still go a bundle for it, but the outlook is probably much less positive in more "developed" markets. It would surely sit much better, and with greater "synergy" potential, in the portfolio of a Nestle or a Unilever - unless the latter sees it too much like the next margarine, which is possible.It is notable they're only committing to a "review" as yet - that is how it should be IMHO. If they can indeed get a frothy (!!) price for it - and I can see why it might today, if not necessarily down the road - then it makes sense to me. If they can't, then maybe just milk it (!!!) for cash? Ultimately, keeping options open, without raising excessive expectation, has to be the sensible road - and as we've learned from both ULVR's Spreads sale and the Pfizer Consumer debacle, the market for supposedly "iconic brands" is not as universally bubbly as some would have you believe....
Bill1703
28 Mar 2018
Re: GSK deal - broker soundbites "According to the analyst comment reported on today's Markets Live... it looks as if this will be earnings accretive, say 2-3%, and the extra debt will mean further sizeable M&A is impossible so the divi is safer than it was. Plus weaker £ also helpful.... would the shares be overvalued on a 5% yield when the price would be 1560, I doubt it."Following on from OP's post, see below for a few summary views from the "horses' mouths"... and FWIW, while I can't remember if I've put a "fair value" target on this in the recent past, I think OP's 1560p is probably pretty much where I am, too.UBS"... The valuation is broadly consistent with the contingent liability on GSK's balance sheet... and at 18x LTM EBIT/3x LTM sales seems sensible to us... Assuming GSK will finance this mostly out of commercial paper initially and then refinance the amount in bonds, we estimate a net accretion potential to earnings after interest payments of c3% (the forgone minority pay-away amounts to 7% of EPS). Of note, GSK now talks about Consumer Health margin potential in the mid-20s by 2022 which is ahead of the current target of greater than 20% by 2020, suggesting the potential accretion could rise over time.After walking away from bidding for the Pfizer OTC business last Friday for returns and capital allocation priority reasons (as per company press release), we do not see GSK return to the bidding process. The Novartis put has always been the #2 capital allocation priority for GSK CEO (investment in pharma is priority #1) and we believe all of the above is hence consistent with GSK's prior statement on capital allocation."KEPLER"Consumer Health has become less appealing after a slowdown in market growth recorded by a number of key players, including GSK and Bayer – GSK now expects low-single-digit 2018 growth. However, this was a well-flagged capital allocation priority, and GSK said that the put option (in terms of size and timing) was creating inherent uncertainty for capital planning. Furthermore, GSK has done well in operating margin improvement of the JV, increasing it from 11.3% in 2015 to 17.7%.This deal looks more appealing than the Pfizer USD20bn Consumer Health business; GSK was in pole position for acquiring this, and the stock was up almost 4% last week after GSK reportedly pulled out of the deal. Given the deal raises GSK’s net debt/EBITDA from 1.7x to 2.7x, we think this stops GSK from doing meaningful M&A in the near- to mid-term."MORGAN STANLEY"Timing is a bit more surprising given recent comments from Novartis CEO suggesting they were in no rush to sell. Completion of the deal is expected in summer 2018. The value is close to what was anticipated - GSK already had £8.8bn booked as short term liability on its balance sheet ($12.5bn at current rates). We calculate that this transaction should lead to a 2% EPS accretion and 2018 Net Debt/EBITDA ratio of ~2.0x for GSK, post asset sales. GSK expects the strategic review for its consumer assets to be completed around end 2018. We also note that the press release suggests a margin uplift - GSK now forecasts mid-20s margins by 2022 (we have 22% in 2022). We see this dealas a clear positive for both companies -clarification for both, more flexibility in cash allocation for Novartis, strategic move for GSK. We do not expect this move to put the dividend at risk as it decreases the risk of a large scale M&A."
Bill1703
28 Mar 2018
Re: Blinder or blunder? "Looks like Novartis have cashed in here - the projections for 2022 are just that, "projections" and history often deals a less than generous hand when mergers are settled and the reality hits home... But it looks like a """Need to be seen to be doing something moment"... if it was your own money would you pay that for it?"The answer to the latter, Games, being - no, if I had a spare £9 billion or so, I probably wouldn't. But I'm not sure that's the point... and if your priority is a decent, relatively stable cash flow return on investment, with some scope for growth (albeit moderate), then it probably stacks up rather well against alternative uses of anyone's funds.Games is right, you have to be a bit wary of "5 year" projections... begs the question, if they are confident of "mid-20s" margins here, why are they only earning 17%-odd today in an already a fairly mature operation? As it is, around 18x EBIT looks pretty full given GSK group trades on nearer 11x EV/EBIT - with any luck, it tells us that GSK is undervalued rather than the other way around!? If they do get anywhere near their margin targets - and more like 12x EBIT - then it will emerge as a pretty good deal, but I wouldn't want to get ahead of ourselves in awarding medals to EW & co just yet.Worth remembering, too, there are no real synergies here, as there would've been with the Pfizer biz - it is largely just an ownership reshuffle. But equally, there is minimal execution risk, which as Games infers is typically the bigger issue with any large scale M&A. As it is, while some 2-3% EPS enhancement is the clear consensus, I'd view this as more like "value neutral", with earnings enhancement offest by modestly higher equity risk from balance sheet leverage. However, the market - and most analysts - seem to read this as positive, in that it likely rules out any further big deals for the foreseeable, which very well may have jeopardised the dividend.Maybe... maybe not? It shouldn't be all about the divi, but that's what people seem to think. In that regard, it is not the (modest) EPS enhancement that matters, but the boost to free cash flow - harder to quantify as yet, but very likely more significant, given the cash generation profile of the more stable Consumer biz. And lest we forget, the GSK div policy is (quite rightly and progressively) now based on FCF... maybe the market is smarter than we often think, and already looking through to this?But IMHO this is nothing to do with GSK needing to be seen to be "doing something", and everything with Novartis exercising their put option at the earliest opportunity. They key point, ultimately, being that this was a transaction already baked into market forecasts and views - as it was, likewise, in the balance sheet. So it's largely just crystallising a financial profile we've already factored in... It does beg one further question, though. If Novartis had, instead, indicated they were content with the JV status quo for a while (and we can be sure they were sounded out in advance), then maybe EW would indeed have carried through with a serious play for the Pfizer unit? Probably we'll never know - but still, probably for the best.
Lupo di mare
28 Mar 2018
Re: Making a Horlicks of it..... Not necessarily in a minority, Punilux, they're hedging their bets by bigging up on CH; gets Lupo's vote.Wonder what Bill makes of it; he's good for detailed point of view.
Punilux
28 Mar 2018
Re: Making a Horlicks of it..... I'm probably in a minority, but selling the family silver to maintain an SP related bonus might not look too bright in a few years time unless a new blockbuster comes on line.
gamesinvestor
28 Mar 2018
Re: Making a Horlicks of it..... "(Lupo - I wish that had been "maintaining THE dividend", but maybe I'm picking hairs)"I don't think you are. Often it's the nuances of the wording that you have to watch. "A" certainly covers Emma's whatsit in the event that the dividend has to be reduced, frozen, stalled or whatever.It could be that they link it to growth like Sainsbury -- which is a cut in real terms.Games
Lupo di mare
28 Mar 2018
Re: Making a Horlicks of it..... Oh games, you did it! You said the blindingly obvious - see heading.Anyway, I guess that you're thinking of differing curry flavours? Maybe a side hint of mango chutney? I jest, they appear to already have three alternatives.Here's some paragraphs that caught my eye."She said any sale would help ensure GSK could meet its top priorities of overhauling its pharmaceutical division and Maintaining A Dividend. (Lupo - I wish that had been "maintaining THE dividend", but maybe I'm picking hairs)The deal will need the approval of GSK’s shareholders and is expected to complete this summer.David Cox, analyst at Panmure Gordon, commented that the development "should be taken positively" by investors. "The added stability the consumer business provides will allow the longer term R&D investment that GSK has already stated is key to the future," he added."
gamesinvestor
28 Mar 2018
Making a Horlicks of it..... Selling Horlicks looks like wrong move maybe :-[link] Horlicks needs is a simple marketing move to make 4 or 5 different flavoured versions and put them in different coloured bottles and up the advertising.It'd sell like crazy.After all if you can bring people to fever pitch with flavoured tonic with no fizz in it, you can sell anything, at seemingly any price!!Games
frusset
27 Mar 2018
Re: Blinder or blunder? My guess is, GSK paid a bit more than the value of the stake, but it's worth it to say goodbye to the put option Novartis holds. The liability for it has been a drag on profit every time it's gone up. The deal will make the liability disappear, offsetting most of the hit to the balance sheet. Whether the accounting benefits are real or cosmetic, I think they're mostly real, but you could probably argue over it at great length.
old_punter
27 Mar 2018
GSK deal According to the analyst comment reported on today's Markets Live (FT.com, Alphaville) it looks as if this will be earnings accretive, say 2-3%, and the extra debt will mean further sizeable M&A is impossible so the divi is safer than it was. Plus weaker £ also helpful. An attractive yield at 1350p of 5.8% so maybe the shares are still a buy, would the shares be overvalued on a 5% yield when the price would be 1560, I doubt it.
reader61
27 Mar 2018
Re: Blinder or blunder? I think the latter from what I have a vague memory of reading? Pretty flat share price for several years so It could be suicidal for her to start cutting dividends prior to moving heaven and earth first I suspect. I hope anyway and so far she's appearing to be energetic and efficient which at her remuneration I would expect anyway.
Hydrogen Economy
27 Mar 2018
Re: Blinder or blunder? Interesting to compare the market reaction to the $13B Novartis deal given the response to EW discussing interest in Pfizer CH at the 3Q analysts call, which led to on analyst summary below."We believe that the bear case of a potential dividend cut is again a credible option, notably in the context of the CEO's remarks that they are looking at Pfizer’s consumer unit... we flag that the potential acquisition price of USD14-25bn would weigh heavily on GSK's balance sheet, which is already under pressure: 1.7x net debt to EBITDA in 2018e, potentially increasing to above 3x..."13B Vs 14-25B. Will the divi worries re-emerge or are the returns on the Novartis share and whatever they can make from Horlicks good enough to keep paying. H2
gamesinvestor
27 Mar 2018
Re: Blinder or blunder? """"36.5% stake in their consumer healthcare joint venture for $13bn (9.15 Bn GBP).ie 18 x OPERATING profit.Looks pretty pricey, but market seems happy."""""Looks like Novartis have cashed in here - the projections for 2022 are just that, "projections" and history often deals a less than generous hand when mergers are settled and the reality hits home. At least GSK have a working knowledge of the operation.But it looks like a """Need to be seen to be doing something moment"You have to ask yourself, if it was your own money would you pay that for it?The market's euphoria could be short lived, or it could be a catalyst to re-rate it upwards -- time will tell.Games -- possibly not.
