GSK castoff starts life with target on its back

GlaxoSmithKline’s personal health spinoff is beginning life with a target on its back. Haleon, maker of Advil painkillers and Sensodyne toothpaste, will next month list in London, and could be worth 42 billion pounds. But with two large shareholders keen to sell out, lots of debt and a challenging consumer backdrop, it may not stay single for long.

Back in 2018, GSK Chief Executive Emma Walmsley chose to disentangle GSK’s two core businesses, hoping to give her tired drugmaker extra focus and firepower by gearing up and hiving off the consumer division. Four years later, GSK will float the unit and hand most to shareholders, including partner Pfizer, which will have a 32% stake. GSK will own 13%.

The listing has a lot to live up to. Walmsley rejected a 50 billion pound bid from Unilever for Haleon in January on the grounds that it undervalued the business. Assume new Haleon CEO Brian McNamara grows revenue by 5%, the middle of his 4% to 6% target range, and sales for this year will reach 9.5 billion pounds. On the division’s historic 25% margin, EBITDA could total 2.5 billion pounds. Put that on the same 17 times multiple as Colgate Palmolive, which has a similar growth profile, and the business would be worth around 42 billion pounds including debt.

Still, Haleon has some unique risks. Pfizer and GSK both plan to offload their stakes in coming years. That roughly 40% share overhang will depress its stock. Haleon will also be shouldering a heavy debt burden, worth 4 times its expected EBITDA in 2022, compared to Colgate which operates on just 1.5 times, or Reckitt on 2 times. That extra debt may make it hard for Haleon to invest in brands like Advil, which were slowing before the pandemic, or defend market share if cash-strapped consumers choose to dump pricey branded products.

Those factors may lead some investors to steer clear, depressing Haleon’s valuation. It could prove more appealing to a rival. Unilever may struggle to mount another bid, given its shareholders’ opposition to the last one, but Procter & Gamble or Johnson & Johnson, itself in the process of spinning off its consumer arm, could. Nestlé and Reckitt have also previously considered a takeover. Haleon may find it harder to repel a suitor next time around. Reuters