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Why GSK's bathroom cabinet splurge leaves it in good health

It's not often that a chief executive splurging nearly £10bn is rewarded with a 6% rise in the share price.

Yet that has been the pleasurable experience today of Emma Walmsley, chief executive of GlaxoSmithKline (Other OTC: GLAXF - news) , Britain's biggest pharmaceuticals company.

GSK is buying out Novartis (IOB: 0QLR.IL - news) , the Swiss drug-maker, from the pair's consumer healthcare joint venture for £9.2bn.

The deal will give it full ownership of brands including Panadol, Nicorette, Tums, Sensodyne and Aquafresh.

Previously, GSK owned 63.5% of the business and Novartis the other 36.5%.

The joint (Frankfurt: 1JO.F - news) venture dates back to a complex three-way deal in April 2014 in which GSK sold its cancer business to Novartis and bought the Swiss company's vaccines arm in return.

The pair also agreed to pool their consumer healthcare brands - bringing together GSK brands such as Aquafresh, Sensodyne and Nicorette with Novartis brands including Excedrin and Voltaren pain reliever.

So why the jump in the share price?

Mainly because the move brings certainty.

From 2 March this year, Novartis has had the right to sell its stake in the joint venture to GSK, but had previously indicated it was in no hurry to do so.

That lack of clarity over when Novartis would look to sell was unhelpful to GSK, particularly in view of the sum of money the British company was going to have to put up.

So this deal means GSK can now plan more effectively on how it wishes to allocate capital to invest in its various businesses.

Nor does it appear to be paying too hefty a premium: the £9.2bn price tag compares with the £8.6bn or so at which the stake was recently valued by GSK.

Apart from the added clarity, the company is also flagging the benefits of full ownership, pointing out that the consumer healthcare business has grown sales at an annual average of 4% since the joint venture was formed and seen its profit margins rise from 11.3% to 17.7%.

GSK will, in future, enjoy 100% of the cash generated by the business instead of just 63.5% - and, in theory, be able to raise its dividend as a result

But this deal isn't just about raising the pay-out to investors.

The biggest question many shareholders have had about GSK is where growth is going to come from in its core pharmaceuticals business.

Developing drugs is an expensive and risky business and Ms Walmsley's predecessor, Sir Andrew Witty, spent much of his tenure 'de-risking' GSK by building up consumer healthcare - where returns are lower but more predictable.

With (Other OTC: WWTH - news) the question over how much capital she will have at her disposal now lifted, Ms Walmsley will be free to spend more on research and development, where last year she unveiled a major shake-up aimed at concentrating the company's financial firepower at fewer projects .

Investors have also taken comfort from news that GSK may sell Horlicks and some other consumer nutrition products to help pay for the deal.

These businesses had sales last year of £550m and so might be expected to attract a price tag of around £3bn - covering almost a third of the price GSK is paying Novartis.

The Novartis deal also helps explain why, last week, GSK walked away from buying the consumer healthcare arm of Pfizer (NYSE: PFE - news) , the US drugs giant, which includes brands such as Advil painkiller, Centrum multi-vitamin and Chapstick lip balm.

That would have cost up to $20bn, which would have put a strain on even GSK's balance sheet, potentially putting at risk the dividend.

Ms Walmsley clearly knew, when walking away from the Pfizer business, that a deal with Novartis was imminent.

For Pfizer, though, it's all a bit of a headache.

Its consumer healthcare business is seen as attractive - yet at a time when the likes of GSK and another potential buyer, Reckitt Benckiser (Xetra: A0M1W6 - news) , have been under pressure to demonstrate greater financial discipline - it has clearly not been a good time to try and sell it.

Pfizer's Scottish-born chief executive Ian Read must be heartily fed up of Britain.

First (Other OTC: FSTC - news) , his attempt to buy AstraZeneca (NYSE: AZN - news) was thwarted in 2014 by an aggressive response from the company and a torrent of criticism from British politicians.

Now (Frankfurt: 11N.F - news) his attempt to sell a major part of his business has been thwarted by not one but two companies here.