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GlaxoSmithKline leads FTSE higher on Pfizer tie-up

Fund managers welcome assurances over dividend as GlaxoSmithKline announces plan to hive off consumer healthcare business into joint venture with Pfizer.

GlaxoSmithKline leads FTSE higher on Pfizer tie-up

Update, adds fund manager comment: GlaxoSmithKline (GSK) had led the FTSE 100 higher, as shares in the pharmaceutical giant jumped on news of a consumer healthcare joint venture with US rival Pfizer (PFE.N).

Shares in GlaxoSmithKline rose 4% to £15.06 on the news, helping the UK blue-chip index rise 65 points, or 1%, to 6,766.

Investors welcomed news of the tie-up, in which GlaxoSmithKline will have a 68% stake. The joint venture will boast £9.8 billion in annual sales, and GlaxoSmithKline said it would deliver annual savings of £500 million by 2022 and cost £1.2 billion to set up. A spin-off London flotation of the new business is planned within three years.

GlaxoSmithKline confirmed it expected to have paid 80p in dividends by the end of its financial year, in line with 2017 and 2016's payouts, and would target the same for next year.

Jefferies analyst Peter Welford, who rates the shares a 'buy', gave the move a cautious welcome.

'We see the strategic rationale with cost savings and the opportunity to crystallise value,' he said.

'The intended separation of the group will allow the resulting pharma and consumer companies to be established with appropriate capital structures for their future investment needs.

'GlaxoSmithKline notes the more durable cash flows of the consumer business will be able to support higher leverage levels than the GlaxoSmithKline group today, creating the opportunity on separation to reduce the leverage in the new pharmaceuticals/vaccines company.'

Fund managers back deal

Fund managers backed the move, welcoming the assurances over the dividend.

'Investors will welcome the all-equity nature of the joint venture on consumer health with Pfizer, ensuring there is no added pressure on the dividend which has been under a cloud for a significant period,' said Ketan Patel (pictured), manager of the EdenTree Amity UK fund. 

'The plan to demerge and list the consumer healthcare division on the UK market will transform GlaxoSmithKline into a pure pharmaceutical company focused on a select few therapeutic areas, something prominent investors have been long calling for.'

Sue Noffke, manager of the Schroder Income Growth (SCF) investment trust, said GlaxoSmithKline had struck a 'good deal'.

'GlaxoSmithKline has avoided payting a premium for the Pfizer business whose assets were up for sale earlier in the year, whilst accessing significant synergy benefits for shareholders.'

David Pringle, manager of the Kames UK Equity Absolute Return fund, said GlaxoSmithKline's track record suggested it could make a success of the tie-up.

'We have a neat looking deal that looks to replicate the success of the joint venture that GlaxoSmithKline created with Novartis a few years ago,' he said.

'The fact that GlaxoSmithKline have already run the playbook for this kind of deal gives us a lot of comfort on their ability to execute and potentially exceed the targets they have published.'

Legal & General UK Equity Income manager Stephen Message meanwhile sounded a note of caution over the potential for future dividend growth.

'Given the JV will likely have a dividend payout ratio in the range 30% to 50% on separation suggests that total shareholder payments may be reduced longer term as it would be unlikely that the payout of the remaining pharmaceutical business will rise,' he said.

Walmsley marks break with Witty regime

GlaxoSmithKline has long been under pressure to break up its business, with former investor Neil Woodford once leading calls for change.

Previous chief executive Andrew Witty was resistant, leading to Woodford selling his stake last year.

'Under Andrew Witty's leadership, calls for GlaxoSmithKline to spin off the consumer business fell on deaf ears, and until now it looked like new chief executive Emma Walmsley would follow suit and ignore claims that GlaxoSmithKline's parts are worth more than the whole,' said George Salmon, equity analyst at Hargraves Lansdown.

'In the short-term, teaming up with Pfizer means GSK will become over the counter market leader in pretty much all major geographies around the world, and the partnership should bring significant cost savings too.

'Still though, all deals can be made to look good on paper - the challenge will be delivering smooth execution of those planned savings.'

On the FTSE 250, 888 Holdings (888) led the way, as the online bookmaker said it would meet full-year earnings expectations, jumping 8.5% to 184.4p.

Among 'small-cap' stocks, Gulf Marine Services (GMS) crashed 75.2% to 8.3p as the support vessels maker warned it expected to breach some banking covenants.

On the Alternative Investment Market, Yu Group (YU) tumbled 26.7% to 78.8p as the energy supply business said City regulator the Financial Conduct Authority was planning to investigate its announcements.

Shares in the business, backed by Gervais Williams and Martin Turner, managers of the Miton UK Smaller Companies fund and Miton UK Microcap (MINI) investment trust, have fallen from an all-time high of £13,45 in March, plunging in October on a profit warning.

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