Moody’s Investors Service has today changed to negative from stable the outlook of GlaxoSmithKline plc and its guaranteed subsidiaries. This follows the company’s 3 December 2018 announcement of its intention to acquire Tesaro for $5.1 billion.
GSK said it had reached a definitive agreement to acquire Tesaro, a US based biotech company known for its Poly ADP-ribose polymerase (PARP) inhibitor, for $5.1 billion in cash. The transaction – expected to close in the first quarter of 2019 – more than offsets the approximately $3.05 billion of net proceeds that GSK will receive after it divests from Horlicks and other Consumer Healthcare nutrition products to Unilever plc, and its Consumer Healthcare Limited (GSK India) merger with Hindustan Unilever Limited.
By 30 September 2018, GSK displayed a leverage – defined as Moody’s adjusted debt/ EBITDA – of around 3.6x. Moody’s expectation for GSK’s leverage was to move below 3x by the end of 2019 under the assumption that asset disposals would contribute to a lowering of the company’s outstanding gross debt.
This changed with GSK’s move to acquire Tesaro. Its future deleveraging will be slower than initially expected, says Moody’s.
Tesaro is currently running with an operating loss and GSK has said it expects the acquisition to be earnings accretive to its earnings per shares from 2022. As a consequence, the acquisition of Tesaro will, in addition to increasing debt, also put pressure on GSK’s EBITDA and cash flows over the next three years and Moody’s believes GSK is likely to operate with a leverage above 3x until at least 2021. This is stretched for the A2 rating level and, at least in the short term, not in line with the company’s prior public commitments toward a strengthening of its credit profile.
“We have changed GSK’s outlook to negative as the company will deleverage more slowly than expected following the acquisition of Tesaro. While the acquisition allows for a solid strengthening of GSK’s oncology franchise, we expect credit metrics to remain weak for a prolonged period of time,” says Knut Slatten, a Vice President – Senior Analyst at Moody’s.
Still, Moody’s has affirmed GSK’s A2/(P)A2 long-term and (P)Prime-1 ratings.
In view of the change of outlook to negative, upward pressure on the ratings is not anticipated in the short term. A stabilisation of the outlook would require credit metrics to strengthen from their current levels so that the (gross) debt/EBITDA ratio would show a glide path to below 3x beyond 2019 with a cash flow from operations (CFO)/debt ratio improving towards the high 20s (as adjusted by Moody’s).
Over time, upward pressure on the A2 rating could develop should CFO/debt improve towards 40 per cent with a Moody’s adjusted debt/EBITDA decreasing below 2.5x on a sustainable basis.
Negative pressure on the rating could arise if GSK’s debt/ EBITDA were to fail to deleverage from current levels leaving its leverage ratio sustainably above 3x with a CFO/debt remaining below the high 20s.