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Rating Action:

Moody's places A1 ratings of GSK on review for downgrade

23 Apr 2014

Frankfurt am Main, April 23, 2014 -- Moody's Investors Service has today placed on review for downgrade the A1 long-term ratings of GlaxoSmithKline plc (GSK) and its rated subsidiaries. Concurrently, Moody's has affirmed the (P)P-1/P-1 short-term ratings of GSK and affected subsidiaries.

RATINGS RATIONALE

The review initiation was prompted by GSK's announcement that they will enter into a three-legged M&A transaction with Novartis Group consisting of the (i) disposal of the group's oncology business for USD16 billion (including $1.5 billion of contingency payments); (ii) acquisition of Novartis' vaccines business (excluding the flu vaccines franchise) for $5.25 billion (plus $1.8 billion of future milestone payments and ongoing royalties), and (iii) creation of a consumer healthcare joint venture owned 63.5% by GSK and fully consolidated. As part of the proposed transaction, GSK will also grant Novartis a put option on its 36.5% stake in the joint venture. The put option is exercisable from the end of year 3 post closing of the transaction in full or in part.

The proposed transaction will lead to net after tax cash proceeds of $7.8 billion (GBP4.6 billion equivalent), of which GBP4 billion will be distributed to shareholders of GSK through a B share scheme. At the same time GSK will have a material contingent liability arising from the put option granted to Novartis, which Moody's would add to its adjusted debt and adjusted credit metrics. The rating agency estimates that the put option could be valued in excess of GBP6 billion based on a valuation multiple of 8x EBITDA leading to a deterioration in credit metrics well below Moody's expectations for the current rating (namely cash flow from operations (CFO)/debt above 40% and Cash / Debt in excess of 30%). This factor, coupled with the distribution of most of the net after tax cash proceeds to shareholders and the weak rating positioning of GSK prior to the announcement of the transaction, was the main driver for placing the A1 long term ratings of GSK under review for downgrade.

At the same time, Moody's recognizes that the proposed transaction makes strategic sense for GSK because it will bolster the group's over-the-counter (OTC) and vaccines businesses, making it the second-largest player in the Consumer Health segment behind Johnson & Johnson (Aaa stable) and the world leader in OTC as well as a world leader in vaccines. The reinforcement of the group's OTC business will give GSK more earnings and cash flow stability and reduce its exposure to patent expiries. In addition, the valuation of GSK's oncology franchise is very attractive with a revenue multiple of 10x (based on 2013 revenues).

The affirmation of the (P)P-1/P-1 short term ratings of GSK and affected subsidiaries reflects Moody's view that the negative impact of the put option on the group's credit metrics is partly mitigated by the exercise conditions and the expectation that GSK will maintain a balanced policy between shareholders remuneration and solid credit metrics, including after a potential exercise of the put options. It also reflects the group's very strong liquidity profile for the next 12 to 18 months supported by good level of cash on balance sheet, strong operating cash flow generation and good availability under committed revolving credit facilities.

The review process will be mainly focused on (1) an in-depth assessment of the strategic rationale for the acquisition; (2) a review of the short- to medium-term business prospects for both the Vaccines and Consumer Health business franchises; (3) the precise pro-forma impact of the transaction on GSK's s credit metrics, including the valuation of the put option; (4) a review of potential mitigants GSK would consider implementing to reduce the risk of the put option on Novartis' 36.5% stake being exercised in full after the three year blackout period.

WHAT COULD CHANGE THE RATING UP / DOWN

Due to the announced transaction and the weak rating positioning of GSK prior to the announcement of the deal, we do not anticipate positive rating pressure in the short to medium term. Upward pressure could be exerted on the rating as a result of a combination of improving credit metrics (well in line with the A rating category, as defined by our Global Pharmaceutical Industry rating methodology) and a continued strong business profile.

Conversely, existing guidance prior to the April 22 announcement stated that downward pressure could be exerted on the rating if GSK's credit metrics weaken further or do not recover within the next year to the levels expected for the A1 rating. Such weakening of the group's credit metrics could be the result of (1) additional debt-financed acquisitions; (2) large-scale share buybacks; (3) the launch of generic copies of Advair; and (4) sizeable incremental cash outflows resulting from litigation.

The principal methodology used in these ratings was the Global Pharmaceutical Industry published in December 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Stanislas Duquesnoy
VP - Senior Credit Officer
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's places A1 ratings of GSK on review for downgrade
No Related Data.
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