In order to escape slowing sales in Western economies, GlaxoSmithKline (NYSE:GSK) plans to invest more heavily in its non-prescription consumer healthcare business in emerging markets. As Reuters reported on Monday, the British pharmaceutical company has announced it will increase its stake in India’s GlaxoSmithKline Consumer Healthcare from 43.2 percent to 75 percent and raise the company’s stake in its Nigerian consumer products unit from 46.4 percent to 80 percent. The transactions will cost the drug manufacturer more than $1 billion.
What are the Benefits of the Deal?
For GlaxoSmithKline’s Indian unit, which manufactures heath drinks and over-the-counter drugs and balms, the transaction “represents a further step in GSK’s strategy to invest in the world’s fastest growing markets and, we believe, offers a liquidity opportunity at an attractive premium for existing shareholders,” said Chief Strategy Officer David Redfern in a press release.
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The unit’s flagship product, Horlicks, is India’s most popular health drink; in 2011, it generated sales of $432 million, which accounted for approximately three-quarters of the its total revenue. To capitalize on that success, GlaxoSmithKline plans introduce new variations of the brand and expand its Horlicks business into the north and south of the country. “A lot of the current business of Horlicks is in the south and the east of India,” Redfern told Reuters. “So there is still a great opportunity to increase the penetration to the north and the west.”
GlaxoSmithKline expects the Indian unit to be earnings neutral this upcoming year and be “accretive thereafter.”
CHEAT SHEET Analysis: Is This Deal a Positive “Catalyst for GSK’s Stock”?
One of the core components of our CHEAT SHEET Investing Framework focuses on catalysts that will move a company’s stock. In particular, mergers and acquisitions have huge potential to influence a company’s trajectory. For GlaxoSmithKline, this investment in its Indian operations will offset the difficult market conditions in Europe, which have hindered GSK’s efforts to return to sales growth this year.
As for the cost, the company said that it will finance the Indian and Nigerian transactions through its existing cash resources.
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