GlaxoSmithKline PLC (GSK, Financial) appears to be holding a stealth auction of its consumer health care unit without actually calling it as such. It is fielding bids from interested parties for this part of its business, which is now the largest consumer health care company in the world.
GlaxoSmithKline confirmed recently that it has received three unsolicited, conditional and non-binding proposals, one of which was from Unilever PLC (UL, Financial), to acquire its consumer health care business. The latest proposal received on Dec. 20, 2021 was for a total acquisition value of 50 billion British pounds ($68 billion) comprising £41.7 billion in cash and £8.3 billion in Unilever shares.
The consumer health care business is technically a Joint Venture between GlaxoSmithKline and Pfizer (PFE, Financial), with GlaxoSmithKline holding a majority controlling interest of 68% and Pfizer holding the remaining 32%.
GlaxoSmithKline rejected all three proposals on the basis that they fundamentally undervalued the consumer health care business and its future prospects. Aside from the Unilever bid, the other two offers are thought to be from private equity groups, and their identities were not disclosed. However, it is rumoured that the two groups are a consortium of Advent International, CVC Capital Partners and KKR & Co as well as another consortium of Blackstone Inc., Carlyle Group Inc. and Permira. These are all unconfirmed rumors, so take them with a grain of salt.
GlaxoSmithKline has been under pressure from activists like Elliott Management to split up the company into three: pharmaceuticals, vaccines and consumer health care. These same big-time investors are also lobbying to oust the management and board of directors. The activists say that the current management and board have not been good stewards of the company, which is why it has fallen behind many of its peers. The current board and management of course resist the accusations of incometence but have agreed to spin off the consumer health care business, which is now in the works.
Management is also open to selling the business off to a strategic buyer outright as well if it can get the right price. If sold, it is not clear how the company will use the money obtained from the sale. Previously, the company had said that it planned to give 80% of the shares from its portion of the Consumer Group IPO to the shareholders and retain 20% for later disposition. Pfizer has not said anything about the plans for its portion of the Joint Venture, except to say that it will monetize it.
The GlaxoSmithKline consumer health care business is chock full of iconic global brands. It was originally assembled by combining GlaxoSmithKline's over-the-counter drug business with the Novartis (NVS, Financial) consumer health portfolio in 2015 and the Pfizer consumer health portfolio in 2019.
Since hitting a low in the 2020 to 2021 period, GlaxoSmithKline shares have been perking up in anticipation of the pending spinoff. It's currently rated as fairly value by the GF Value chart.
The GF Value is an intrinsic value estimate from GuruFocus that uses the stock's historical price multiples, past returns and estimates of future business performance.
GuruFocus' valuation panel also indicates that the stock is fairly valued:
The dividend yield is 4.88% currently but is expected to be cut after separation of the consumer business.
On a enterprise-value-to-Ebitda ratio basis compared to a set of peer companies, GlaxoSmithKline looks very cheap. Based on peer valuation, the stock could be 75% higher. However, GlaxoSmithKline faces some challenging times as generic competition looms for Advair, its blockbuster Asthma drug. Also, the fact that GlaxoSmithKline lost out on the Covid vaccine front despite being the world's largest vaccine maker is a blackmark.
Last year, Elliott Management had estimated in its sum of parts analysis that GlaxoSmithKline's consumer health care business was worth £33.80 per share to GlaxoSmithKline shareholders. The rejected Unilever offer is about the same as that. It's now likely the business will fetch another 10% to 20% more than anticipated. GlaxoSmithKline shares have risen by over 15% since then but still have another 30% to rise, if Elliott's estimates of value are correct.
It is very interesting that Unilever has decided to bid for the business. I wasn't expecting it, so I believe it is very possible that there may be other bidders. Portfolios of such iconic brands rarely come to the market, which means they could earn a significant brand premium from interested buyers.
