Haleon PLC LSE:HLN listed yesterday (18th July) in London, in what was the biggest IPO in London since Glencore LSE:GLEN over 10 years ago. The company emerged from pharmaceutical giant, GSK LSE:GSK, which will, post-demerger, concentrate on developing its vaccine and pharmaceutical lines, whereas Haleon will focus on consumer medicine.
Haleon is expected to be a world-leader in the healthcare industry thanks to its already established portfolio of global brands. The brands include Voltaren, Sensodyne, Panadol and Centrum to name but a few. These are all well-established brands that are already used by consumers worldwide.
It was a painful time to be entering the market, whilst global concerns about inflation abound. Opening at 330p, Haleon had fallen back 6.6% to close first-day trading at 308.4p, giving the new firm a valuation of around GBP 30.5bn.
This was disappointing, given the chatter in the run-up to the IPO in some corners was a valuation nearer to the GBP 40bn mark. That said, Haleon is now the world’s biggest standalone consumer pharmaceutical business, and one of the FTSE’s largest 20 companies.
Poor judgement
However, questions abound as to GSK’s strategic judgement given that Unilever LON:ULVR had made an offer of GBP 50bn for the division at the end of 2021, GSK rejected the offer, stating that Unilever had undervalued its consumer pharmaceuticals business. The final value realised yesterday from the listing would justify a mini-riot by GSK shareholders, who are rightly aggrieved this action has deprived the company of near GBP 20bn by rejecting Unilever’s advances.
A lot of the shade will be thrown at GSK’s current CEO, Emma Walmsley who has been in the post since 2017. She justified the decision to spin-off Haleon, saying that the demerger would tackle “perennial underperformance” by leaving the drug company with a stronger balance sheet while setting Haleon free to invest in marketing and new products.
However, these platitudes justifying the gap between Haleon’s market value and Unilever’s offer will not make questions from investors go away, and Walmsley conceded: “It will be for Haleon’s management to justify why they rejected the approach.”
Self-sustaining
Haleon will start life with net debt of just over GBP 10.3bn and a net debt-to-Ebitda ratio of around 4x. Haleon’s incoming chief financial officer, Tobias Hestler, told Deutsche Bank’s Global Consumer Conference this month that he expects the company’s general and administrative expenses to fall as it becomes a “self-sustaining” company. As a result, its margins will improve, leaving it with capacity to invest in advertising and promotion and, more importantly, research and development.
The Unilever offer took account of Haleon’s net debt position.
Gareth Hazelden, Founding Partner and Director of Atlantic Capital Markets, a UK multi-asset brokerage said: “Whilst this is a large and exciting IPO, there are also some key considerations to take into account.”
Hazelden explained that Haleon’s success depends on its ability to anticipate and respond to changes in consumer preferences. He said: “Increasing dependence on key retail customers, changes in the policies of the group’s retail customers, the emergence of alternative retail channels and the rapidly changing retail landscape may materially affect Haleon’s business.”
He warned that Haleon may not be able to develop and commercialise new products effectively, which may materially and adversely affect the results of the group’s operations and financial condition.
Another issue is Haleon’s ability to obtain, maintain and enforce sufficient intellectual property rights to protect its business and vice versa defend claims that Haleon is infringing the IP rights of other researchers.
Haleon currently has operations in five categories of consumer healthcare, which all contributed toward its revenue in 2021:
- Oral health – 28.5% of revenue
- Pain relief – 23.4% of revenue
- Digestive health and other – 20.4% of revenue
- Vitamins, minerals and supplements (VMS) – 15.7% of revenue
- Respiratory health – 11.9% of revenue
The spin-off will be headed by former Novartis executive Brian McNamara, who was incumbent prior to the de-merger, and chaired by former Tesco chief executive Dave Lewis. McNamara forecast annual like-for-like sales growth of between 4% and 6%, though most analysts expect growth at the lower end of that range.
UBS predicted that 2022 could well be a strong year for Haleon as: “recovery from historically weak cough/cold seasons over the Covid pandemic becomes visible,” and pricing tailwinds hit the company’s profit and loss account. Another interesting point is that Haleon has lower exposure to commodities costs than its peers, and that rising inflation could therefore make the company look attractive.
What now for GSK?
Following the demerger, GSK will purely focus on biopharmaceuticals, with primary focus being the development of vaccines and speciality medicines. Management has said that over the next five-year period it expects to deliver compound annual growth in sales of more than 5% and adjusted operating profit of more than 10%.GSK shares will continue trading as normal under the ticker GSK. The company intends to carry out a consolidation to ensure the GSK share price remains consistent both before and after the demerger, keeping the company’s earnings per share and share price comparable to previous reporting periods. The demerger is expected to cost GSK approximately GBP 2.4bn but will give the company a GBP 7bn war chest. GSK is expected to use the injection to develop its drugs pipeline.
The GSK Consumer Healthcare business is a joint venture between GSK (68%) and Pfizer (32%). The demerger will take 80% of GSK’s 68% holdings. The demerger will also establish an American depositary receipt (ADR) programme on the NYSE, giving the shares a listing in New York as well.
The Company will come to own the entire issued share capital of each of GSKCHH and PFCHH which, together, own the entire issued share capital of CH JVCo, the current parent company of the Group.
Following the split from GSK, the total issued ordinary share capital of Haleon will be held as follows:
- GSK shareholders will jointly own at least 54.5%
- GSK will hold up to 6%
- Pfizer will continue to hold 32%
- Certain Scottish limited partnerships – which provide funding to GSK pension pots – will hold 7.5%
There will also be a lock in period and whilst it has not been confirmed on a specific time frame the lock-up period is expected to last several months. Following which Pfizer is expected to sell down its stake in Haleon. There is an agreement in place between Pfizer and GSK to ensure that their selling of shares does not destabilise Haleon shares.
As the market closed, GSK started a period of consolidation aiming to restore GSK’s share price to pre-demerger levels. At midday trading GSK’s share price was 1776p, up 38.95p from start of play. GSK started the week at 1719p.
Haleon, according to McNamara, would prioritise reducing its net debt position and would seek growth through acquisition – having the capacity for one bolt-on addition a year for the next two years and was targeting fast-growing start-ups in the GBP 50m to GBP 100m range.
