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* Divestment comes as Novartis reviews sub-scale operations
* Acquisition to make diagnostics 20 pct of Grifols business
* Deal expected to close in first half of 2014
* Grifols shares up 3.5 percent, Novartis adds 0.9 percent
By Silke Koltrowitz and Sarah White
ZURICH/MADRID, Nov 11 (Reuters) - Switzerland's Novartis has agreed to sell its blood transfusion testing unitto Spain's Grifols for $1.68 billion, in anincreasingly buoyant market for healthcare deals.
The sale comes as Novartis carries out a broad review ofoperations following the departure of veteran chairman andone-time CEO Daniel Vasella, the architect of the merger ofCiba-Geigy and Sandoz that created Novartis in 1996.
The acquisition will give critical mass and a significantU.S. presence to Grifols' previously small diagnostics business,which in future will account for a fifth of its revenues.
The healthcare industry is undergoing a wave of mergers andacquisitions as large drugmakers shed non-core activities, whilesimultaneously trying to bolster their new drug pipelines bybuying up smaller firms.
Current Novartis Chief Executive Joe Jimenez and newChairman Joerg Reinhardt have both stressed they will only hangon to businesses that are among world leaders.
Jimenez said on Monday he started the review of Novartis'sbusinesses - including the blood unit which carries out tests toensure blood transfusions do not contain infections - in thespring and the matter had gone to the board over the summer.
He said other potential sell-offs were possible as Novartisexamines whether three sub-scale businesses - vaccines anddiagnostics, over-the-counter (OTC) products and animal health -have a long-term future in the group.
"We need to have global scale in these businesses and rightnow we're in that process of gaining scale or considering otheroptions for these businesses," he said in an interview.
Analysts at Jefferies said the Grifols deal marked the firstmove in a long-awaited restructuring and they expected vaccinesto be the next area of focus.
The brokerage previously estimated the combined vaccines anddiagnostics unit could be worth around $7.7 billion, suggestingthe remaining part could eventually be sold for some $6 billion.
Novartis has three core businesses where it is either marketleader or number two in various segments - pharmaceuticals,eyecare and generic medicines.
Jimenez said the group would continue to look for bolt-onacquisitions to strengthen its leading market positions."However, we're very disciplined from a financial standpoint andprices have increased in biotech and overall healthcare in thelast few months," he said.
He added the company would provide a general overview ofstrategy, as well as an in-depth look at the pharmaceuticalbusiness, particularly oncology, at an investor day on Nov. 22.
Many global drugmakers, including Pfizer andGlaxoSmithKline, have stepped up the pace ofrestructuring amid investor demands for management to returnmore capital to shareholders and unlock value trapped insidelarge firms.
THREE TIMES SALES MULTIPLE
The deal with Grifols gives Novartis a good price for theU.S.-based blood transfusion diagnostics unit, which wasacquired in 2006 as part of Chiron and which had net sales in2012 of around $565 million.
Novartis is keeping other diagnostics that are closelylinked to its pharmaceuticals pipeline.
Vontobel analyst Andrew Weiss said the transfusiondiagnostics business was one with no synergies to the remainderof the Novartis group and the price of three times sales seemed"fair" and in line with valuations in the sector.
For Grifols, the world's third-largest blood products maker,the acquisition means diagnostics will now make up 20 percent ofits revenue, up from 4 percent now, and that annual turnover inthe business will grow to around $1 billion.
Nuria Pascual, deputy finance director at Barcelona-basedGrifols, said she did not rule out further acquisitions, addingthe current pace of deal-making in the healthcare sectorreflected a trend towards greater focus by companies.
"There is a lot of activity right now ... it's perhapsbecause there is an evolution towards specialisation," she said.
Grifols shares rose 3.5 percent by 1040 GMT. Novartis was up0.9 percent and Europe's health sector up 0.5 percent.
Pharmaceutical deals have been among the brightest spots ina small merger and acquisition revival in recent months, with Amgen's $10.4 billion purchase of Onyx Pharmaceuticals in theUnited States among bigger transactions.
Also on Monday, Shire said it had agreed to buyViroPharma for about $4.2 billion to create a leadingforce in treatments for rare diseases.
Grifols said it would finance its purchase with a $1.5billion loan, pushing up its debt to 3.2 times earnings beforeinterest, tax, depreciation and amortisation (EBITDA), accordingto a spokeswoman for the company. The adjusted debt to EBITDAratio was 2.6 times at the end of September.
The deal requires regulatory approvals and is expected to becompleted in the first half of 2014, the companies said.
Nomura acted as financial adviser to Grifols. Novartisdeclined to name the banks it worked with on the transaction.
