Waiting for a mega GSK deal hurts like a toothache

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There’s a mega-deal in the UK just waiting to happen. The difficult question for investors is how long this wait will last.

GSK Plc’s consumer healthcare business will be a takeover target when it spins off from the drugmaker in July. Haleon, as the maker of Sensodyne toothpaste and Panadol painkillers is called, attracted a failed £50bn ($62bn) bid from consumer goods giant Unilever Plc in December. Pushing back against another such approach will be much more difficult once it is a separate company listed in London and directly accountable to its shareholders.

However, the field of suitors has shrunk. Unilever CEO Alan Jope is reportedly struggling to relaunch this year because his investors opposed a deal in the first place. Procter & Gamble Co. CEO Jon Moeller said in January that he saw no need for a major acquisition; he would need to make a shrewd case to change tactics. And US drugmaker Johnson & Johnson is currently tied to its own split.

Private equity firms sniffed around, Bloomberg News reported. But financing a deal of this size looks difficult today, unless debt markets suddenly rally. Then there is Nestlé SA. The Swiss confectioner has considered an offer in recent months, potentially in partnership with its British counterpart Reckitt Benckiser Group Plc, but decided against it, Bloomberg News revealed last month. Buying Haleon outright would mark a surprising shift from CEO Mark Schneider’s strategy.

This leaves room for Reckitt to drive a deal. Here, the strategic logic is obvious.

The Slough-based company is already a major player in consumer health. A combination with Haleon would leave it with a global portfolio of painkiller brands including Advil, Nurofen, Panadol and Voltaren. The digestive health business would span Nexium, Tums and Gaviscon. Reckitt would also ramp up its know-how to make old prescription treatments succeed as over-the-counter drugs.

No wonder former Reckitt CEO Rakesh Kapoor considered buying the consumer healthcare arm of Pfizer Inc. before it went into a joint venture with GSK to form what became Haleon. The problem for GSK’s investors (the future shareholders of Haleon) is that his successor, Laxman Narasimhan, has no reason to rush a deal.

Haleon gains its independence at a difficult time. Being a newly listed stock with a relatively unknown direction doesn’t sit well with today’s risk-averse markets. Some analysts are cautious, sketching organic sales growth in the lower “medium term” range of 4% to 6% led by Haleon.

Additionally, hedge funds may view Haleon as a relatively low-risk stock to sell short. Pfizer and GSK plan to offload their remaining stakes after the split. If Haleon’s stock price rose, they would likely sell some of their stock and hedge funds could cover their short positions.

Assume Haleon commands a valuation somewhere between Reckitt’s 14 times and P&G’s estimated 16 times in 2023 earnings before interest, tax, depreciation and amortization, which Barclays Plc analysts put at £2.85 billion. . He is said to be trading with a net worth of around £30-35bn after deducting his £10bn of net debt.

Still, Reckitt’s market value is just £44billion. This limits Narasimhan’s trading options. He could try an all-stock merger with a small premium, or no premium at all. Instead of being cashed in with a high price, Haleon investors would share in the upside as the deal paid off over time.

Cost savings could represent 5-10% of Haleon’s revenue, based on past transactions in this sector, implying a potential £1 billion increase in operating profit. Reckitt’s strength in creating premium versions of its remedies may also boost sales. Even after resetting Reckitt’s margins to a lower, more sustainable level, the company is more profitable than Unilever and Nestle after adjusting for one-time costs.

But Haleon shareholders might prefer a direct takeover, seeing Unilever’s proposal as the benchmark. Thus, Narasimhan could instead surround himself with a partner and share the business. Nestlé could take vitamins – the piece that probably sparked his interest – or Unilever oral care. Units such as ChapStick and Dental appear to be prime candidates for elimination.

The best course would probably be to sit back and hope Haleon drifts and Reckitt outperforms over the next few months. Then Narasimhan could finish the cleanup job he’s doing and let that boost Reckitt’s relative valuation so he’s in a better position to get a deal done.

Narasimhan inherited a company that needed to invest in growing sales and fixing its supply chain. He is gradually reshaping the portfolio, more recently selling the Chinese infant nutrition unit. A full sale of the Mead Johnson infant formula business that Kapoor bought in 2017 could be a positive catalyst for stocks.

Of course, Narasimhan cannot wait forever. At some point, a rehabilitated Unilever, or J&J’s newly independent consumer health business, could emerge as rival suitors. But he can afford to choose his moment.

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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering consumer goods and the retail industry. Previously, she was a reporter for the Financial Times.

Chris Hughes is a Bloomberg Opinion columnist covering the deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

More stories like this are available at bloomberg.com/opinion

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