Shares in pharmaceutical giant GlaxoSmithKline (GSK) shot to the top of the FTSE 100 leaderboard on Monday, gaining 5% to £17.19 after the company revealed it had received three unsolicited offers from Unilever (ULVR) for its consumer healthcare division.
The latest proposal was received on 20 December and valued the division at £50 billion, comprised of £41.7 billion in cash and the remainder in Unilever’s shares. Management have rejected all offers after concluding that they ‘fundamentally undervalued’ the business and its prospects.
Consequently, the original plan as communicated to shareholders last summer is to move ahead with the spin-off at least 80% of the business sometime around the middle of 2022. The consumer healthcare division is 68% owned by Glaxo and 32% by US pharma company Pfizer.
Today’s announcement follows on from a report by Bloomberg in October 2021 that the consumer healthcare division had piqued the interest of private equity buyers and would represent one of the biggest buyouts of all time, valuing the business at around £40 billion.
ATTRACTIVE GROWTH PROFILE
Defending its decision, Glaxo’s management said the consumer healthcare business had an ‘exceptional portfolio of world-class, category leading brands’ led by a highly experienced team with the potential to sustainably grow ahead of its categories in the years to come.
Management expects the business to achieve a compound annual growth rate in revenues of between 4% to 6% over the medium term and expand operating margins while generating consistently high cash flows, providing an attractive financial profile for existing and future shareholders.
The clear risk for management, having rejected three offers is that the spin-off falls short of the rejected offers in terms of market valuation. This would heap pressure on chief executive of consumer healthcare, Brian McNamara, at the upcoming capital markets day scheduled for 28 February where key financial information will be provided.
Activist shareholder Elliot Advisors which holds a significant stake in Glaxo have yet to weigh in publicly on the latest board decision.
THE EXPERT’S VIEW
Investment director at AJ Bell Russ Mould commented: ‘Some long-term GlaxoSmithKline investors may not want a sale, as they might have been looking forward to the consumer goods unit being demerged later this year.
‘Demergers can be beneficial as management are able to run the business with more freedom, rather than simply being a division of a bigger company and having to follow group protocol. Therefore, the consumer goods arm could be worth a lot more in time, if allowed to forge its own path as a standalone business and potentially enjoy a stock market re-rating.’
Pharmaceutical analysts at Liberum said Unilever’s offer represented a 33% premium to their latest sum-of-the parts valuation of Glaxo.
‘It’s now hard to envisage the unit trading at a significant discount to 20x, and it is now likely to be sold at this multiple or higher.’
Based on this Liberum estimates the underlying pharmaceutical business is trading on a forward price to earnings ratio of 14 times which it argues is ‘too cheap’ versus the sector and in light of ‘a sustained period of double-digit earnings growth.’
Disclaimer: The author Martin Gamble and the editor of this article both own shares in AJ Bell, the owner of Shares