Last year, GlaxoSmithKline (LSE :GSK) and peer Novartis unveiled a complex three-way deal in which the two pharmaceutical giants would trade more than £11bn of assets.
The innovative deal is designed to help the two groups clean up their asset portfolios. Glaxo is offloading its cancer treatment division to gain Novartis’ vaccine units and also enter into a joint venture to create the world’s biggest consumer healthcare business.
The deal is set to boost Glaxo’s sales by £1.3bn, to £26.9bn, on a 2013 pro forma basis and is also expected to be accretive to core earnings per share from the first year. Further benefits are expected to filter through until 2017 as the delivery of cost savings, new product launches and the re-introduction of Novartis’ over the counter products accelerates.
Additionally, Glaxo estimates that total annual cost savings of £1bn could be achievable by the fifth full year following closing.
And so far, this complex three-way deal is going to plan. Regulators in both the US and Europe have given the green light and the two companies are on-track to close the sometime in the next five months.
Missing something
All in all, the Glaxo-Novartis deal will be extremely beneficial to Glaxo’s earnings over the long term. Cost savings of £1bn per annum will also widen the group’s profit margins, boosting profit for shareholders and giving more room for dividend payouts as well as stock buybacks.
But investors are also set to profit in the short term. You see, there’s one key paragraph in the Glaxo-Novartis deal document that many investors seem to have missed:
Capital return
GSK plans to use net after tax cash proceeds of $7.8 billion to fund a capital return of £4 billion to shareholders following completion of the transaction. This return is expected to be implemented through a B share scheme in 2015, subject to approvals. Specific details related to the execution of the B share scheme will be sent to shareholders in due course.
With around 5bn shares outstanding, a cash return of £4bn is worth around 80p per share. In other words, Glaxo’s investors are set to receive a special dividend of 80p per share this year. This is excluding the company’s regular, quarterly dividend payout which is also set to total 80p per share for the year.
Set to outperform
So overall, Glaxo’s shareholders could be set to receive dividend income of 160p per share this year, a yield of 11% at current prices. This hefty yield should help Glaxo outperform during 2015 and most investors will be looking to reinvest the payout which should push the company’s shares higher.
