* Novartis' one-third stake in Roche built up under Vasella
* Vasella exit, retirement of Roche chairman could thaw relations
* Roche seen as most likely buyer for the stake
* Could make offer in second half of this year - analyst
By Caroline Copley
ZURICH, May 16 (Reuters) - A changing of the guard at Switzerland's two biggest drugmakers is fuelling talk that Novartis may finally sell its multi-billion-dollar stake in cross-town rival Roche, potentially unlocking value for both sets of shareholders.
The departure of Daniel Vasella after 17 years as chairman of Novartis and the forthcoming retirement of his adversary, Roche chairman Franz Humer, may prompt both sides to negotiate a sale that could boost earnings per share for each - and appease shareholders during a period of slower growth.
"If Roche can buy this stake it's more positive for them than it is for Novartis, in terms of leverage on earnings. It's accretive for Novartis, but very accretive for Roche," said Jefferies' analyst Jeff Holford.
Roche declined to comment on the issue. But the company faces slowing growth as key medicines go off patent and sales of its hepatitis C drug Pegasys decline. It could seize the chance to offer shareholders a sweetener in the form of a buyback.
Vasella built up the holding between 2001 and 2003 with the aim of merging the firms into one super Swiss pharma company. But, meeting resistance, he kept the stake as an investment and said selling it would be very short-term thinking.
The rise in Roche's valuation has put the group out of reach of Novartis as a takeover target, but the holding has proved a rewarding investment: the voting bearer shares are currently worth 12.8 billion Swiss francs ($13.6 billion) and provided Novartis estimated income of 538 million francs in 2012.
The holding, 6.2 percent of Roche's total share capital and a one-third voting stake, also gives exposure to any upside potential in Roche's pipeline.
Novartis' chief executive Joe Jimenez has stressed the holding has a strategic value that far exceeds its market price. Still, he has indicated a willingness to dispose of the stake as long as shareholders can be fairly compensated for its value.
Birgit Kulhoff, a money manager at private bank Rahn & Bodmer who owns Novartis shares, thinks the drugmaker would be best placed leaving the money where it is for now.
"I'm quite happy with the stake for the time being," she said. "As long as current market conditions exist, anything that pays very high dividends and has sustainable cash flow is a good investment."
But some analysts said the stake was currently undervalued by the market. Michael Nawrath at ZKB said Novartis could command a premium of between 30 and 40 percent, while Jefferies' Holford put it at 30 to 50 percent.
A sale would give Novartis a hefty cash pile to buy back its own shares and boost core earnings per share as it goes through a period of slowing growth.
Buying back shares is an increasingly common tactic among large drugmakers, who are experiencing limited growth in Western markets as patents on medicines expire. Earlier this month major rival Merck authorised additional purchases of $15 billion of its common stock, following a lead from rivals including market leader Pfizer.
Although Roche has no history of buybacks, it is edging closer to its target for a net debt to assets ratio of 0-15 percent, after paying down debt from its 2009 acquisition of Californian biotech Genentech.
The drugmaker is expected to be back within its target in the second half of this year, giving it cash for a buyback.
Roche has two sets of shares: voting bearer shares, the type owned by Novartis, and non-voting equity securities known as "Genusscheine" and must include both in any buyback.
Assuming Novartis was willing to sell up piecemeal, Jefferies' Holford said Roche could perform an extended share repurchase programme across both the equity classes over a period of perhaps six years at a premium of between 30 and 50 percent - boosting core earnings per share by 30 percent.
"In that way Novartis could drip feed the stake away, and Roche would be able to drip their buyback into the market."
ZKB's Nawrath, however, suggested Novartis offer the stake to Roche in one go, allowing it buy the 53.3 million voting shares and then cancel them in order to increase its profit per share ratio. Assuming a premium of 40 percent, Roche would have to cough up around 18 billion francs for the stake.
Such a move could boost Roche's 2013 core earnings per share growth by an extra 9 percentage points if it cancels all the shares, Nawrath estimated.