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* Scope for deals in consumer goods sector
* Asset swaps avoid merger pitfalls
By Ben Hirschler, Martinne Geller and Anjuli Davies
LONDON, April 23 (Reuters) - The loud welcome given byinvestors to this week's deal for Novartis andGlaxoSmithKline to trade more than $20 billion of assetscould trigger more pacts in the pharmaceuticals sector andbeyond.
Such swapping of assets is rare in any sector, yet it canmake a lot of sense where companies are committed to playing totheir strengths by building up certain businesses and divestingothers, while avoiding the pitfalls of large-scale mergers.
With the Novartis-GSK template now available for all toexamine, bankers and industry experts said that a milestone hadbeen passed.
Chris Stirling, global head of KPMG's lifesciences practice, expects more asset swaps to be discussed inboardrooms of drugmakers and large corporations with portfoliosripe for restructuring, such as consumer goods groups.
"Where you've got large global businesses operating in lotsof different areas, then I think this is something chiefexecutives will now look at seriously, given that this dealprovides them with a great example," he said.
Novartis will buy cancer drugs from GSK while its Britishrival takes most of the Swiss group's vaccines, with the twocompanies also creating an $11 billion-a-year non-prescriptionconsumer healthcare business.
CLEAR BENEFITS
The complicated nature of the deal means it was tricky topull off and could easily have been derailed. That risk offailure, illustrated by the collapse of earlier talks betweenNovartis and Merck, has been a deterrent in the past tocompanies weighing such involved transactions.
The potential benefits, however, are clear. Swapping assetssaves companies from having to access capital markets or sellingto private equity firms at cut-throat prices, says RichardStroud, head of the consumer goods and services practice at GLGResearch.
"They're speaking corporate to corporate, partner topartner. They're both in the same boat, so no one's trying tooutdo each other," Stroud said. "In consumer goods, there aresome areas where it would work incredibly well."
He suggested one potential deal, whereby the family thatowns Germany's Beiersdorf and the Tchibo coffeebusiness would swap Tchibo with Joh. A Benckiser's (JAB) Coty. Such a deal would unite Coty cosmetics brands such asRimmel with Beiersdorf's Nivea, La Prairie and others, as wellas JAB's three coffee businesses with Tchibo.
One of the biggest hurdles to asset swaps is that theyrequire competitors to put aside traditional rivalries.
"You need the leaders of both companies to be grown-upenough to give up a good asset and trade that for a strongerposition in an area where they can achieve leadership," said oneindustry source who asked not to be named.
FEWER STRINGS ATTACHED
For companies that can agree on valuation and areas offocus, the payoff is a greater range of options with fewerstrings attached.
"When you are already a $100 billion company, actuallymerging leaves an enormous cost-cutting headache," said oneindustry banker. "I don't think there is any need for more megamergers; these companies are too big already."
Scale, however, does matter when it comes to research anddistribution of products in a global business. Without itcompanies cannot compete effectively and lose pricing power.
That is particularly relevant in the health sector, wheregovernments and insurers want better outcomes at lower cost,creating a spending scenario that Novartis CEO Joe Jimenezdescribes as "brutal".
Birgit Kulhoff, a fund manager and analyst at private bankRahn & Bodmer in Zurich, said that other drugmakers withbusinesses that are not among the top three players in theirmarkets could be candidates for asset swaps and joint ventures.
The line-up could include Germany's Bayer andFrance's Sanofi, both of which have over-the-counterdrugs businesses that could be built up, she said. (Additional reporting by Caroline Copley in Zurich; Editing byDavid Goodman)
