GSK: consumer demerger is the right prescription for UK drugs giant
The portmanteau of “hale” and “Leon” is meant to convey health and strength. The merged word reflects GlaxoSmithKline’s optimism about its soon-to-be demerged consumer business. On Wednesday, the pharma group published the prospectus for Haleon, which is set to become one of the 20 largest companies on the London stock market when it floats next month.
The demerger is meant to unlock value. One argument is that consumer industries experts will value the business more generously than pharma analysts. Haleon, which expects to increase sales at a rate of 4 to 6 per cent, might get a premium rating like Nestlé.
The latter’s EV-to-ebitda multiple of 17.8 is at least a fifth higher than sector laggards. Haleon will be more highly geared, with debt of four times ebitda. But free cash flow of at least £1bn a year should get leverage down below three times by 2024.
That suggests an enterprise value of about £45bn, equating to a market value of about £35bn, plus £10bn of debt. That would justify its rejection of last year’s £50bn Unilever bid, making allowances for a sizeable control premium.
Splitting off Haleon will focus scrutiny on the rump pharma business. Activist shareholder Elliott argued last year for a valuation multiple several points higher than usually applied. Its proposed EV-to-ebitda multiple of 12 implied a punchy £100bn valuation. That is just a tenth less than that of the combined group today.
GSK has a lot to prove for that to happen. But it has a big and growing exposure to vaccines, which provide higher quality earnings than medicines. It is awaiting trial results for its RSV vaccine, a potential blockbuster. On Tuesday it bolstered the vaccine business with the $3.3bn acquisition of Boston-based biotech Affinivax.
The demerger should make more bolt-on deals possible. It will free up GSK’s balance sheet by reducing its debts and providing a £7bn dowry. Seeing will be believing for GSK’s long-suffering investors. But the demerger promises to be a valuable catalyst.
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