Reckitt and GSK balance risk-reward in high-stakes Pfizer battle

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LONDON (Reuters) – Executives of GlaxoSmithKline GSK.L and Reckitt Benckiser RB.L – two of Britain’s best-known but worst-performing companies – are in a high-stakes battle for a dose of Advil to ease their pain.

FILE PHOTO: Reckitt Benckiser CEO Rakesh Kapoor speaks at the Reuters Global Consumer and Retail Summit in London, Britain September 11, 2013. REUTERS / Benjamin Beavan / File Photo

Drugmaker and consumer goods group, both under pressure from investors to improve operations, face a delicate risk-reward balance in potential $ 20 billion auction for Pfizer PFE.N consumer care unit.

Pfizer’s portfolio of strong brands such as the pain reliever Advil, Vitamins Centrum and Chapstick Lip Balm present an excellent opportunity for Reckitt and GSK to develop a very large scale in the still fragmented over-the-counter (OTC) market. .

OTC remedies are long lasting brands with loyal customers, and the purchase of the Pfizer business would consolidate Reckitt and GSK in a leading position in the market.

However, the acquisition would represent a financial strain on both, as well as the growing threat from Amazon.com. AMZN.O in the TBT space is an additional uncertainty.

Both CEOs have expressed interest in the Pfizer auction, although neither company has confirmed participation. But people familiar with the matter say they are in the running.

“Neither side has to make this deal,” said Steve Clayton, portfolio manager at Hargreaves Lansdown, which owns shares of both companies in funds worth £ 500million ($ 695million). .

“The value of our investment depends mainly on what they already have. This must be the top priority for management.

With Reckitt and GSK stocks having underperformed their respective European sectors by 13 and 14% over the past year, the two bosses already have their work cut out for them.

Reckitt grapples with a slowing market and the continuing fallout from a South Korean security scandal, failed product launch and cyberattack.

GSK is grappling with a shortage of promising new drugs in its pipeline at a time of increasing competition in its major respiratory and HIV divisions.

CONVINING INVESTORS

Rakesh Kapoor, CEO of Reckitt since 2011, is renowned for his business acumen and financial rigor in his quest to transform Reckitt from a heavy-duty UK cleaning product maker into a mainstream healthcare powerhouse.

Still, he came under pressure last year over his high salary, which was slashed, and the $ 16.6 billion acquisition of struggling infant formula maker Mead Johnson, the largest ever.

Emma Walmsley of GSK, who took over in April, has yet to convince some investors that her background selling shampoo at L’Oréal OREP.PA Prepared her to lead one of the largest anti-drug operations in the world. Doubling down on consumer products risks increasing this skepticism.

It must also ensure that the purchase of Pfizer does not jeopardize the dividend or derail existing priorities of investing in pharmaceutical research and has the resources to buy out the activities of Novartis. NOVN.S minority stake in their consumer health joint venture, if the Swiss company decides to sell starting next month.

The two companies also need to assess how prepared they are to let the credit ratings slip for a big acquisition, at a time when global interest rates appear to be on the rise.

Reckitt said he would be prepared to temporarily drop his rating down to BBB for a “spectacular” deal.

“A short-term downgrade in the debt rating to what is a once-in-a-generation opportunity makes sense,” said Harold Thompson, shareholder of Reckitt, partner at consumer-focused investment firm Ash Park Capital.

GSK is currently rated A2 and Moody’s Investors Service analyst Knut Slatten said its credit quality in 2018 will depend on the company’s appetite for transactions.

Still, Morgan Stanley analysts said downgrades might not be necessary, given a range of funding options available outside of simple debt taking or equity issuance, which would dilute returns. shareholders. Examples include bridge loans secured by the sale of assets or partnership with a financial investor.

GSK could close the deal through its joint venture, and in Reckitt’s case, the home and hygiene industry could be fertile ground for divestitures, especially since it now operates as a separate business from health, from this year. “They were presented with an opportunity at Pfizer that really pushes them to decide the next decade of their destiny,” Jefferies analyst Martin Deboo said of Reckitt.

Reckitt will release its full year results on February 19, and another improvement from Mead Johnson could warm more investors to a Pfizer bid if it signals the deal integration is on track.

($ 1 = 0.7193 pounds)

Reporting by Martinne Geller; Editing by Catherine Evans


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