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GSK’s Demerger of Haleon

By Nancy Huang (University of Melbourne), Fuh Zhe Yi, Ahaan Roychowdhury and Harold Parra Halder (University College London)

Photo: Mika Baumeister (Unsplash)

 

Overview of the deal


Seller: GSK

Target: Haleon

Implied Equity Value: £30.3bn

Implied Enterprise Value: £39.4bn

Total Transaction Size: £16.5bn

Closed date: 18th July 2022

Advisors: Bank of America, Citi, Goldman Sachs (Financial); Cleary Gottlieb Steen & Hamilton, Freshfields Bruckhaus Deringer, Sullivan & Cromwell (Legal)


On 18 July 2022, GSK completed the separation of its Consumer Healthcare business to form Haleon, an independent listed company. The separation was effected by way of a demerger of approximately 80% of GSK’s 68% holding in the Consumer Healthcare business to GSK’s shareholders, with each receiving one share of Haleon for every five shares of GSK they held. The Consumer Healthcare business was a joint venture between GSK and Pfizer, with GSK holding a majority controlling interest of 68% and Pfizer holding 32%. The remaining GSK business will continue to operate as a pharmaceuticals and vaccines company.


At a market valuation of ~£30bn, Haleon listed on the London Stock Exchange under the ticker symbol 'HLN', in what was the largest London listing in more than a decade, although in choppy markets overshadowed by inflation concerns. The listing makes Haleon the world’s biggest standalone consumer health business as well as one of the FTSE’s largest 20 companies, boasting a portfolio of category-leading brands that includes Sensodyne, Panadol and Centrum.


The demerger allows GSK, which has faced pressure from activist investors, to sharpen its focus on its core pharmaceuticals and vaccines business, while Haleon concentrates on growing its consumer healthcare business. Additionally, both companies are better positioned to pursue their own strategic goals and allocate resources more effectively following the demerger. Haleon has said it expects to benefit from long-term trends such as an ageing global population and pressure on public healthcare systems driving consumers to seek to address health problems themselves.


However, given the gap between Haleon’s market value and Unilever’s £50bn offer - accounting for £10bn of debt - for the consumer health business late last year, GSK will face questions about its choice to go ahead with the demerger.


“Haleon brings to life years of hard work by many outstanding people to build this new company purely dedicated to everyday health. Haleon has enormous potential to improve health and wellbeing across the world with strong prospects for growth, and through listing will unlock significant value for GSK shareholders.” - Emma Walmsley, Chief Executive Officer (GSK)

Company Details (Seller - GSK)


Established in 2000 by a merger of Glaxo Wellcome and SmithKline Beecham, GSK engages in the creation, discovery, development, manufacture, and marketing of pharmaceutical products, vaccines, over-the-counter medicines, and health-related consumer products internationally. It operates through four segments: Pharmaceuticals, Pharmaceuticals R&D, Vaccines, and Consumer Healthcare. Its vaccine portfolio includes more than 20 vaccines, and its specialty medicines include medicines for immune-mediated conditions, including the chronic autoimmune condition lupus, respiratory disease, and HIV.


Founded in 1715, headquartered in Brentford, London, UK

CEO: Emma Natasha Walmsley

Number of employees: 90,000

Market Cap: £57.7bn (as of 01/02/2023)

EV: £72.2bn

LTM Revenue: £38.4bn

LTM EBITDA: £11.7bn

LTM EV/Revenue: 1.9x

LTM EV/EBITDA: 6.2x


Company Details (Target - Haleon)


Haleon is the new name of GSK Consumer Health upon its spin-off from the group and stock market debut as a standalone company. The new entity is a FTSE-listed manufacturer and seller of consumer health products, with an extensive portfolio of brands such as Panadol, Voltaren, Advil, Otrivin, Theraflu, Sensodyne, and Centrum. The company's product portfolio is divided among five categories: Oral Health; Pain Relief; vitamins, minerals and supplements (VMS); Respiratory Health; and Digestive Health.


Founded in 18 July 2022, headquartered in Weybridge, UK

CEO: Brian McNamara

Number of employees: 22,000

Market Cap: £29.4bn (as of 01/02/2023)

EV: £38.5bn

LTM Revenue: £10.6bn

LTM EBITDA: £2.3bn

LTM EV/Revenue: 3.6x

LTM EV/EBITDA: 16.9x


Projections and Assumptions


Short-term consequences


The immediate impact is that following the demerger, both companies are better positioned to concentrate on their respective core businesses and allocate resources more effectively. This allows GSK to focus on its pharmaceuticals and vaccines business while Haleon is set free to concentrate on growing its consumer healthcare business. One of Haleon’s key competitive advantages is its advertising and promotional (A&P) investment of 20% of sales. Now free to invest further in marketing, Haleon can drive funds towards strengthening its power brands and increased media spend. In the face of inflationary pressures causing consumers to switch to cheaper, alternative brands, such investments will go a long way in cementing brand loyalty.


The increased focus and improved operational efficiency will also allow the two businesses to be more agile and better respond to changing market conditions. For Haleon in particular, given the mercurial state of consumer trends, the spinoff will allow it to focus on growing capabilities in the rapidly-growing e-commerce space and capitalise on accelerating consumer trends such as the growing consumer trend for natural products - healthcare products that are non-medicated or that include naturally occurring ingredients.


The fundamentals for the £150 billion consumer healthcare market are strong, reflecting an increased focus on health and wellness, significant demand from an ageing population, and sizeable unmet consumer needs exacerbated by pressure on public healthcare systems, driving consumers to seek to address health problems themselves.

As standalone companies, both GSK and Haleon are better able to attract investment and increase their market exposure. For investors, Haleon, as a new standalone company, will have a highly attractive financial profile of above-market sales growth, sustainable margin expansion and high, stable cash generation. This is subsequently an attractive industry and business to have exposure to, especially given its defensive characteristics at a time where volatility is upsetting markets. As outlined by CEO, Brian McNamara, attracting such investment will be key because Haleon not only aims to reduce its debt over time, but also looks for a bolt-on acquisition a year for the next two years, targeting fast-growing groups worth £50mn to £100mn.


Long-term Upsides


Marking the biggest corporate restructuring GSK has undergone in the past two decades, the demerger of Haleon will act as a cornerstone to significant changes in GSK’s prosperity.


The key driver of this demerger is GSK’s aim to become a more focused organisation by shedding its consumer healthcare business and funnelling more resources into developing vaccines and prescription drugs. As part of the spinoff, Haleon will pay a special dividend of £7bn which will serve to cut GSK’s debt by a generous amount, enabling GSK to invest more heavily in its pipeline. This move is synonymous with those of other pharmaceutical giants such as Johnson and Johnson and Merck & Co, who have looked to alter their long-term strategy by shedding their consumer health businesses which, albeit are more stable assets than the pharmaceutical business, have lower margins and profitability. In light of such changes in the industry, GSK’s aim to increase focus on the high-risk, high-reward pharmaceutical business will enable it to retain a firmer grasp of its strong presence in the industry and prevent it from falling behind the competition.


Over the past few years, GSK has been modifying and trimming its consumer healthcare business to give it a more focused approach; the demerger will further bolster this aim and has assisted in Haleon’s medium term forecast of 4-6% annual organic sales growth – well above the industry average. Haleon has also become the biggest stand-alone consumer healthcare business following the demerger, and is home to household names such as Sensodyne and Advil. Given its market share in consumer healthcare and improved organisational structure, Haleon makes a strong argument for itself for having a prosperous future.


Risks and Uncertainties


The GSK demerger with Haleon seems to be leaving Haleon with bigger uncertainties down the road. First of all, due to rising cost of living hitting consumers hard, shoppers might opt for more affordable toothpaste and headache tablet options compared to those sold by Haleon. There are also concerns about the impact of inflation on the business as price rises weigh on retail and consumer stocks. If such concerns actualise, they will lead to a nightmarish start for Haleon as a standalone business, especially if revenues are hit hard by the economic downturn.


On the other hand, there is no major risk to GSK aside from the fact that the business has to be strategic and aggressive moving forward given that competition in the biopharmaceutical industry is intensifying. The £7bn dividend creates new flexibility to invest in innovation and growth for GSK, so the next move is crucial.


In conclusion, it will be interesting to see how Haleon performs as a standalone business. There is optimism that the risks above will not see the light of day because consumers are likely to stick to their favourite or the most recognized brand when it comes to household necessities such as toothpaste and tablets. For GSK, the market looks forward to its next move in the biopharmaceutical industry where M&A activity is rife - perhaps the drop in biotech valuations will yield attractive inorganic growth opportunities for the business this year.


“We will show investors how our world-class portfolio of brands, alongside our competitive capabilities and a compelling strategy to outperform, underpins our confidence in delivering annual organic sales growth of 4-6% in the medium term, and a sustainable financial performance that can drive continued investment in growth and deliver attractive returns to shareholders.” - Brian Brian McNamara, Chief Executive Officer (Haleon)

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