GSK exploring merger, share swap with potential buyers

MUMBAI: A whopping 40% tax burden might hobble the sale of British pharma giant GlaxoSmithKline’s (GSK) Indian consumer products division and to tip toe around the hurdle it has sought potential buyers open to a merger and share swap as part of the deal, two people in the know told ET.

GSK fears a 40% tax liability in India would amount to at least $ 1.6 billion. So, instead of selling the Horlicks brand to the potential buyer, the company has now decided to sell Indian entity entirely — albeit not directly to the potential buyer.

GSK had conducted an internal analysis involving tax experts in Europe and India and a handful of external tax consultants in UK to discover precise tax implications.

“Initially the plan was to sell only Horlicks, as 90% of the total valuation of the company comes from the brand. But an outright sale would attract about 40% tax in India,” said a person with direct knowledge of the matter.

“There could be a merger between GSK and the potential buyer at the India entity level. Thereafter, there would be a share swap and GSK shareholders would look to exit through that,” one of the persons quoted above added. If the company opts for an outright sale of Horlicks it could attract two different taxes.



“If there is an outright sale of a brand then there could a 20% long term capital gains tax, and when the money received by the seller is repatriated outside India, it could lead to an additional 20% dividend distribution tax. In case of a merger or demerger at Indian entity level, there is no straight answer on the tax percentage, as it would depend on the precise tax structuring,” said a senior tax expert who is advising one of the potential buyers who was told of the tax conundrum faced by GSK. Tax experts however say the tax structuring has to be concluded with utmost care as tax authorities could invoke GAAR. Even GST could bite.

“If Horlicks is dealt as a brand sale, there would following taxes on GSK under GST at 18% along with long term capital gains tax at 20% which would come to 24% if one includes surcharge and cess,” said Amit Maheshwari, Partner, Ashok Maheshwary & Associates.

“If there is an outright sale of a brand, then tax of 20% could be levied on such a transaction as long term capital gains tax. In a case where the transaction is sought to be structured differently, one has to be mindful of GAAR, as the primary objective of the restructuring should be driven by commercial considerations rather than for tax reasons,” said Sanjay Sanghvi, senior tax partner, in law firm, Khaitan & Co.

Tax experts said in case of an exit through merger, there could still be share implications but it could be limited to 10% to 15%.

“This is mainly because after the share swap, GSK shareholders would hold shares of the potential buyer’s entity. This calculation would become even more complicated if the potential buyer was an unlisted company,” the person close to the development said.

ET had on May 23 reported that heavyweights including France’s Danone, Hindustan Unilever, Nestle, PepsiCo, Abbott, ITC and Mondelez were competing with US private equity giant KKR to acquire GSK’s 72 % stake in its Indian consumer products division, GSK Consumer Healthcare, in a massive $4-billion deal, the biggest in the Indian consumer industry.

A tax expert advising one of the potential buyers said there was one more tax option being explored.

“The buyer could float a fully owned special purpose vehicle and this entity would merge with GSK. The company (GSK) is very mindful of the tax implications and we were told that UK team has to approve this particular structure,” he said.

“As a publicly listed company, we do not comment on market speculations and will not be able to comment on anything at this point in time,” said a GSK Consumer Healthcare spokesperson when ET tried to reach them for comments on the story.