When Haleon PLC is spun off from GSK PLC (LSE:GSK, NYSE:GSK) next month it is expected to be the biggest stock market listing of the past decade.
The indicative valuation is £42bn, which begs the question why did the UK drugs giant and its partner Pfizer turn down a £50bn offer from Unilever?
This, we’ll never ascertain. The deal affects thousands of private investors, many former GSK employees.
So, here’s what you need to know.
Timetable
- July 6 – Approval for the demerger to be given by shareholders. A formality, the event is convenient for international investors as it is being staged at a hotel within the Terminal 5 complex at Heathrow.
- July 15 – The first part of the separation process begins. This is being done via what’s called a scrip dividend, which means each GSK investor as of the close on the 14th gets shares in the consumer business. GSK will trade on July 15 without the entitlement to shares in Haleon. Its stock is also being consolidated, which means there will be fewer shares in issue. This is to ensure the impact on the share price of the Haleon demerger is mitigated.
- July 18 – Haleon shares begin trading in London. Pfizer and GSK will retain circa 45% of Haleon.
- July 22 – Haleon’s stock will be listed in the US.
- July 27 – GSK’s second quarter results. This will be the first glimpse of how the slimmed down GSK is performing.
- November 10 (or sometime around then when Haleon reports third-quarter numbers) - Pfizer’s ‘lock-up’ ends. So, this is a biggie. Normally, significant shareholders such as Pfizer would be asked not to sell equity for at least six months to allow normal trading patterns to be established post-demerger. In some instances, that lock-up period has been known to extend to 18 months or two years. Pfizer, which will own 32% of Haleon, will be released of that obligation in around four months. While the American drug giant has said it will beat an orderly retreat, the market will view the Pfizer stake as a stock overhang situation. This description imagines the shares are a rock and rubble overhang on a cliff wall that has the potential to dislodge then hit and hurt the climbers below. The stock overhang can hit and hurt the share price. From November 10 on (and probably well before), Haleon stock will be under pressure anticipating Pfizer’s exit.
What the brokers say
Barclays Capital has trawled through 400-odd-page prospectus and distilled its findings into a far less chunky 23-page overview.
Two things struck us from the note. The first, was the indicative valuation range, which, based on a price-to-earnings calculation used to assess companies in the consumer staples sector, comes up well short of the £50bn tentatively tabled by Unilever.
Barclays reckons Haleon shares, once listed on July 18, could be worth anywhere from 249p to 416p, which adds up to an equity valuation of £23bn-£38bn. This is based on valuations ‘multiples’ ranging from 15 to 25 times earnings.
The second interesting ‘takeaway’ from the note was the bank’s interaction with key shareholders on the issue organic sales growth – a major driver of the company’s valuation.
In the note, Barclays said there was “a degree of scepticism” among investors as to whether Haleon could actually hit the 4%-7% top-line target it has set itself. Indeed, it went on to say there was “significant pushback on our 4.7% medium-term growth forecast”.
Jefferies, the American bank that has a stellar reputation in the healthcare sector, has assessed the demerger from GSK’s investment perspective.
It believes that by spinning out Haleon, whose stock trade is painkillers such as Advil, the UK pharma group has divested itself of a headache (its words not mine).
It has based its ‘buy’ recommendation and £21 a share price target on GSK’s own medium-term growth forecasts – an average 6% increase in sales and 12%-14% compound annual growth in per share earnings.
“New GSK is underappreciated, as the number-two growth profile in EU large-caps,” Jefferies said in its note.
“We accept New GSK pipeline remains a work-in-progress, but catalysts are starting to emerge, and the vaccines franchise just keeps getting better.”
One thing to ponder
Those who hold GSK currently as income play (it yields 4.7% or thereabouts currently) will see a cut in the combined GSK/Haleon pay-out post-demerger.
It is estimated that GSK will distribute around 44p a share in Haleon 11p, giving a 3.2% yield.