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GSK to spin off Haleon – our view and what it means for investors

GSK is spinning off its consumer healthcare business which is due to list on the London Stock Exchange next week. We look at what it means for investors.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

GlaxoSmithKline‘s (GSK) in the process of shedding its consumer healthcare business in a spinoff that will put a new company, Haleon, on the market. The split, due to take place on 18 July 2022, will leave shareholders with one share of GlaxoSmithKline and one share of Haleon. For those who don’t already hold GSK shares, Haleon will trade on the London Stock Exchange under the ticker symbol 'HLN'.

Once Haleon makes it to the open market, current shareholders will own the majority of the business. GSK plans to retain a near 14% stake in the business, which it intends to sell off over time. Pfizer owns the remaining 32%, but also intends to sell this stake. Neither GSK nor Pfizer will be able to start selling their holdings until November.

Is Haleon set to thrive?

Glaxo’s separating its consumer healthcare business, responsible for products like Panadol painkillers and Sensodyne toothpaste. The hope is that the two new companies will have better growth potential if they go it alone.

Over the past few years, Glaxo’s been chopping and changing its consumer healthcare business to create a more focused organisation. This, it says, will allow Haleon to grow its sales somewhere between 4-6% annually.

Higher sales should help push margins higher. That’s because once research, development and production costs are covered, a larger proportion of each additional item sold drops straight through to profit. 2021 price hikes feeding through will also help with this.

At the full year, the consumer healthcare business boasted a 23% operating margin while still under GSK – well beyond the average for the sector. That’s contributed to strong free cash flow, with £1.5bn flowing through what will become Haleon in 2020 and 2021.

That kind of cash generation will be necessary once the group breaks free of GSK, because it’ll be taking a hefty debt pile with it. Haleon will start life with net debt worth 4 times underlying cash profits (EBITDA), high by any standard. That means the group will be funneling a large proportion of its cash toward paying that down to more manageable levels.

Management’s targeting debt worth less than 3 times cash profits by the end of 2024. While that would be an improvement, it’s not a job done. Anything over 2.5 puts the group on the higher end for the industry.

This pressing need to pay down debt means Haleon won’t be able to offer high levels of shareholder returns straight away. The group’s aiming to pay out somewhere between 30% and 50% of earnings, leaning more toward the lower end to start.

Once Haleon trades as a standalone company, and the markets determine a valuation, we’ll be comparing that to similar businesses.

Our preferred valuation metric looks at the group’s price compared to its forecast earnings. As a quick litmus test, investors can also look at the price to earnings (PE) ratio. Based on current valuations, which could change, competitors’ price to earnings ratios fall anywhere from 14.2 to 33.1. That’s a huge range. So investors should factor in the uncertainty that comes with going it alone for the first time.

What’s next?

If you’re already a GSK shareholder, you’ll receive one Haleon share for each of your existing shares.

The latest you can buy GSK shares and qualify to receive Haleon shares is 15 July.

Haleon will go on to trade normally on the stock market and non-GSK shareholders will have the opportunity to buy shares. GSK and Pfizer are retaining just over a third of shares. Those shares are likely to come to market at the end of 2022 once the lockup period has expired. While both have signaled they’ll take a measured approach to selling shares, keep in mind that it could put downward pressure on the valuation.

This article is not personal advice, if you’re unsure whether an investment is right for you, seek advice. All investments and any income they produce can fall as well as rise in value so you could make a loss.

Investing in individual companies isn’t right for everyone – it’s higher risk as your investment is dependent on the fate of that company. If a company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.

Unless otherwise stated, estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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