The challenge to GSK from Unilever’s blockbuster consumer bid
What feels better for GlaxoSmithKline? Being offered £50bn for something you were trying to get rid of anyway, which at the very least supports the claims you’d been making about its value, or the warm glow of being proven right?
Activist investor Elliott Advisors had called on the UK pharma company to show it was open to all options for its consumer health joint venture with Pfizer, presumably by running a sale process alongside its preparations for a demerger.
GSK’s response was broadly that any buyer or banker who didn’t know that its collection of toothpastes, vitamins and over-the-counter remedies was on the block wasn’t paying attention.
Unilever was. And news of its shock £50bn bid to buy the consumer health unit pushed the pharmaceutical company’s shares up 4 per cent on Monday.
It is certainly nice to have options. GSK’s move to separate the business has dragged on interminably. Its plans to hold on to a fifth of its 68 per cent stake, or 13 per cent of the business, are a bit of a fudge, but give it an option on some future cash while handing the choice about exposure to consumer brands and their growth to its shareholders.
In reality, the appeal of a supposedly clean sale over a messy demerger seems overplayed. Unilever’s cash-and-stock offer would leave GSK with a stake in the enlarged group, something of debatable appeal. A sale would have tax implications that, say analysts at Credit Suisse, are entirely unclear. And antitrust checks could mean a sale takes a year, whereas the spin is good to go this summer.
When it comes to cash, you can also have too much of a good thing. Investors want to see the receipts from chief executive Emma Walmsley’s efforts to reinvigorate the pharma pipeline, after years of under-investment.
Given the hefty valuations being put on consumer health, the rest of GSK could trade at a single-digit price-earnings multiple and a vast discount to peers such as AstraZeneca and Roche. Yes, changing that will almost certainly involve some early-stage dealmaking. But investors wouldn’t want too much cash from a mega-sale left burning a hole in the board’s pocket.
The only trouble for GSK is that Unilever’s interest puts a very public marker on what success looks like. Pfizer, which would be left with a 32 per cent stake in the newly listed consumer unit and is busy making money hand over fist from its Covid-19 vaccines, might plausibly prefer a quicker sale than a slow sell-down in the market. Either way, that stake combined with GSK’s 13 per cent could weigh on shares in the new company that now has some big numbers attached to it.
GSK’s price expectations for a sale, reported to be £60bn, look ambitious. In upping its projected sales growth forecasts to 4 to 6 per cent for the business, it is trying to nudge the comparisons away from UK peer Reckitt on 16 times 2022 ebitda and towards higher-growth US peers such as Procter & Gamble on 18 times. That gives a price close to £49bn, based on consensus profit forecasts of £2.7bn, on to which you add a takeover premium.
But the business wouldn’t get credit for that from day one in the market: market growth rates in its product categories aren’t that high, for a start. GSK investors in favour of the spin, like Richard Buxton, see the business slowly improving its valuation over time. Those profit forecasts don’t include the extra costs the consumer unit would assume from being separated, something GSK is expected to lay out at next month’s investor day.
Either way, the new business would start life with a target for the team, under chair Dave Lewis, to hit. No one remembers or cares about takeover premia at that point either: just ask Pascal Soriot at AstraZeneca, who spent years batting off questions about Pfizer’s £55-a-share offer for AstraZeneca (before being himself proven right).
The bar for the as-yet-unnamed GSK carve-out to prove itself just got a lot higher.