Haleon PLC's (LSE:HLN, NYSE:HLN) reported interest in large 'strategic scale' acquisitions, such as Sanofi's consumer arm, have been panned by Barclays analysts as unlikely due to its need to reduce debt.
The maker of Senodyne toothpaste, Panadol pain relief and other respiratory and vitamins, minerals and supplement (VMS) brands was said by Bloomberg yesterday to be looking at transactions for the medium to long term, with Sanofi Consumer Health a potential US$30bn merger candidate.
Sanofi consumer brands include Anthisan and Telfast for bites and stings, Buscopan for cramps, Dioralyte for dehydration, Dulcoease and Dulcolax laxatives, and Syndol strong painkillers.
The article, based on unnamed sources, said Haleon plans to “wait until it can show several quarters of strong profit and progress on its debt reduction plan” before any potential transaction, which could be structured as an all-shares merger.
Such strategic-scale M&A in the near term "would look to be at odds with Haleon’s previous remarks", said Barclays analyst Iain Simpson, with the group having repeatedly stated that debt reduction is its current priority.
What's more, 50% of management’s bonus structure is driven by the net debt-earnings ratio by 2024.
"In terms of M&A, Haleon has previously stated that it would be interested only in smaller bolt-on transactions", the analyst added, which he interpreted as meaning purchases in the hundreds of millions, focused on VMS or local over-the-counter brands.
"As such, a $30bn (£24bn) global OTC deal would seem like a considerable change in strategy, in our view."
There was a 'but', though.
With all these caveats, the analysts still ran the forecast numbers for clients "for illustrative purposes".
Were Haleon to fully fund a potential acquisition of Sanofi Consumer Health with debt, Barclays' spreadsheet calculated net debt would peak at 6.5x EBITDA, "which would be well beyond the boundaries of investment grade".
Haleon's debt is currently rated BBB and is forecast to have ended last year with net debt 3.3 times EBITDA.
Using an all-shares deal, as the report suggested, would be around 5% dilutive to earnings per share, the analysts calculated, leaving Sanofi or Sanofi shareholders holding 45% of the combined business.
A deal funded half in cash and half in paper would be roughly 3% accretive to EPS, on the calculations, resulting in net debt peaking at 4.0x EBITDA and leave Sanofi shareholders holding 29% of the combined group.
Arguments against this, the Barclays team said, are that Haleon is "unlikely to want to make a U-turn" on management's previous commitments barely six months after listing.
An all-shares deal "might take time to monetise" and throw a spanner in the works of Haleon's existing overhang, with its shares being still 45%-owned by former parents GSK and Pfizer, which have stated their intention to sell these stakes down in the medium term.