Will GlaxoSmithKline plc Split Itself In Two?

GlaxoSmithKline’s (LSE: GSK) (NYSE: GSK.US) management is working hard to overhaul the FTSE 100’s largest listed pharmaceutical company, after a wave of bad news last year.   

In management’s latest attempt to create shareholder value, Glaxo’s chief executive has revealed that he is considering breaking the group up.  

Creating valuegsk

These comments from Glaxo’s management come after the pharmaceutical company unveiled a disastrous set of second-quarter results last week.

Specifically, the group reported that second quarter core operating profit plummeted 25%, or 14% on a constant exchange rate basis. Turnover fell 13%, or 4% at constant exchange rates, while core earnings per share fell 25% to 19.1p.

Unfortunately, these poor results have only compounded Glaxo’s troubles as the company tries to navigate bribery allegations. What’s more, the company is facing allegations of malpractice by employees all over the world.

Nevertheless, Glaxo’s management believes that one of the group’s most valuable assets is its consumer healthcare business. However, while Glaxo as a group is facing a storm of international criticism, investors are placing a low valuation on the company as a whole, disregarding the strengths of the consumer business.

As a result, Glaxo’s management has stated that in the future, the consumer healthcare business could be spun off, if a time came when it offered more value as a standalone company.

World leader

Thanks to its $20bn deal with Novartis earlier this year, Glaxo is set to become one of the world’s leading consumer healthcare players. Part of the deal was the creation of a consumer healthcare joint venture, with annual sales of $10bn.

Glaxo will own around 64% of the joint venture, with an option to buy out the remainder after three years.

This is where Glaxo’s management believes that value can be unlocked for shareholders. However, for the time being the consumer business fits well into the group. A spin-off right now would lead to higher costs and lower margins.

Still, the prospect of a spin-off is encouraging, especially if it creates value for shareholders.

Cash return

Glaxo’s deal with Novartis did more than create a consumer health giant. As part of the deal, Glaxo is set to receive a cash payout of £4bn, which management has promised to return to investors next year. The cash return will come as a one-off payout via a B share scheme of approximately 80p per share.

For investors, this is great news. Indeed, the one-off payout, combined with Glaxo’s current yield of 5.3%, implies that investors are in line to receive a yield of around 10% next year.

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.