* Scope for deals in consumer goods sector
* Asset swaps avoid merger pitfalls
By Ben Hirschler, Martinne Geller and Anjuli Davies
LONDON, April 23 The loud welcome given by
investors to this week's deal for Novartis and
GlaxoSmithKline to trade more than $20 billion of assets
could trigger more pacts in the pharmaceuticals sector and
Such swapping of assets is rare in any sector, yet it can
make a lot of sense where companies are committed to playing to
their strengths by building up certain businesses and divesting
others, while avoiding the pitfalls of large-scale mergers.
With the Novartis-GSK template now available for all to
examine, bankers and industry experts said that a milestone had
Chris Stirling, global head of KPMG's life
sciences practice, expects more asset swaps to be discussed in
boardrooms of drugmakers and large corporations with portfolios
ripe for restructuring, such as consumer goods groups.
"Where you've got large global businesses operating in lots
of different areas, then I think this is something chief
executives will now look at seriously, given that this deal
provides them with a great example," he said.
Novartis will buy cancer drugs from GSK while its British
rival takes most of the Swiss group's vaccines, with the two
companies also creating an $11 billion-a-year non-prescription
consumer healthcare business.
The complicated nature of the deal means it was tricky to
pull off and could easily have been derailed. That risk of
failure, illustrated by the collapse of earlier talks between
Novartis and Merck, has been a deterrent in the past to
companies weighing such involved transactions.
The potential benefits, however, are clear. Swapping assets
saves companies from having to access capital markets or selling
to private equity firms at cut-throat prices, says Richard
Stroud, head of the consumer goods and services practice at GLG
"They're speaking corporate to corporate, partner to
partner. They're both in the same boat, so no one's trying to
outdo each other," Stroud said. "In consumer goods, there are
some areas where it would work incredibly well."
He suggested one potential deal, whereby the family that
owns Germany's Beiersdorf and the Tchibo coffee
business would swap Tchibo with Joh. A Benckiser's (JAB) Coty
. Such a deal would unite Coty cosmetics brands such as
Rimmel with Beiersdorf's Nivea, La Prairie and others, as well
as JAB's three coffee businesses with Tchibo.
One of the biggest hurdles to asset swaps is that they
require competitors to put aside traditional rivalries.
"You need the leaders of both companies to be grown-up
enough to give up a good asset and trade that for a stronger
position in an area where they can achieve leadership," said one
industry source who asked not to be named.
FEWER STRINGS ATTACHED
For companies that can agree on valuation and areas of
focus, the payoff is a greater range of options with fewer
"When you are already a $100 billion company, actually
merging leaves an enormous cost-cutting headache," said one
industry banker. "I don't think there is any need for more mega
mergers; these companies are too big already."
Scale, however, does matter when it comes to research and
distribution of products in a global business. Without it
companies cannot compete effectively and lose pricing power.
That is particularly relevant in the health sector, where
governments and insurers want better outcomes at lower cost,
creating a spending scenario that Novartis CEO Joe Jimenez
describes as "brutal".
Birgit Kulhoff, a fund manager and analyst at private bank
Rahn & Bodmer in Zurich, said that other drugmakers with
businesses that are not among the top three players in their
markets could be candidates for asset swaps and joint ventures.
The line-up could include Germany's Bayer and
France's Sanofi, both of which have over-the-counter
drugs businesses that could be built up, she said.
(Additional reporting by Caroline Copley in Zurich; Editing by