EUR 4635.28 For Business Accounts Only

A 'Get Out of Jail' Card Worth 20% Upside

We have identified an innovative asset swap that would transform GSK, lead to a re-rating, play to the new CEO’s strengths and dilute exposure to its weak Pharma business. Moreover, this is no longer mere fantasy given that the asset in question is now “in-play”. Pfizer [NR] is looking to sell its OTC business and in the past, GSK had looked to sell its Pharma Established Product Portfolio (EPP). We show this swap would drive c.20% upside to our GSK SOTP.

Asset Swap Structure – We show that GSK could swap the EPP plus $4bn for Pfizer’s OTC business and both parties would benefit from accretion, more focus and execute their respective strategies. We show that the deal would be accretive for GSK by year 2 and would leave enough balance sheet headroom to still fund the Novartis OTC put option.

20% Re-Rating Opportunity – Our SOTP valuation could increase to £20/share after the swap. Consumer earnings would grow materially and be placed on a much higher multiple than the Pharma earnings lost from the EPP. Pharma would also be modestly re-rated having lost a chunk of declining earnings. The conglomerate discount would also likely narrow (from 10% to 5% in our model).

Significant Complementarity – We have mapped the product portfolios of both GSK CH and Pfizer OTC and show that there is limited overlap between the two and that GSK could add as many as 8 “Power Brands” to its portfolio.