GSK Demerger – What You Need To Know About Haleon (HLN) – Forbes

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Published: Aug 11, 2022, 2:30pm
Update 11 August 2022: Shares in both Haleon (HLN) and GSK (GSK) have both fallen sharply today on the back of investor concerns prior to the beginning of legal proceedings related to a former GSK drug.
Haleon, the newly-created consumer healthcare business that was spun out of pharmaceutical giant GSK last month, saw its share price plunge by nearly 12%, while GSK dipped 8.5% in morning trading.
Litigation is due to start later this month in relation to GSK’s former blockbuster drug Zantac. 
The US Food and Drug Administration ordered GSK to take the heartburn medication off the market in 2019 because of worries about the levels of contaminant N-nitrosodimethylamine found in the drug, which has been linked to an increased risk of cancer.
A Haleon spokesperson told Reuters on Thursday that the company is not a party to the US litigation over Zantac: “We have never marketed Zantac in any form in the US, as Haleon or as GSK consumer healthcare,” the spokesperson was reported as saying.

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Update 22 July 2022: Haleon shares (HLN) closed the week well below Monday’s initial opening price after their first full week of trading on the London stock market.
Shares in the world’s newest – and largest – consumer healthcare business rose by 2.3p to a high of 316.5p on Friday before settling back to 315.7p at the close. This is substantially down on their initial price of 330p, originally valuing the business at the start of the week at £30.5 billion.
The price fell as far as 293p on Tuesday.
Haleon, responsible for a world-leading portfolio of consumer health brands including Panadol painkillers and Sensodyne toothpaste, was recently spun out of GSK in a joint venture with US drugs group Pfizer.
Danni Hewson at AJ Bell commented: “It’s been a bit of a bumpy ride for the FTSE’s new addition, but Haleon has come out on top – just. 
“It’s got a lot going for it, particularly when it comes to pricing power, and investors will like the breadth of household names that fall under the banner. Even if prices go up consumers are likely to stick to their favourite brands and they’ll keep buying products like painkillers and mouthwash even if they have to cut back in other areas. 
“But right now investors want a degree of certainty to try and offset market volatility, and Haleon can’t deliver that. 
“There are big question marks about what will happen when the lock-up period ends in November and GSK is likely to get shot of a chunk of its shares. Then there’s the valuation, which came in way below the price offered by Unilever a few short months ago.
“Can it stand on its own two feet? Investors seem prepared to give it time to prove it can, but this week has been fairly upbeat compared with what markets have been through this year, next week could be an entirely different story.”
Update 19 July 2022: Haleon’s shares closed down 6.6% yesterday after opening at 330p on its first full day of trading.
The newly spun-off consumer health division of GSK ended the session on 308.4p, marking a lacklustre debut on the London market, its largest listing in more than a decade.
In early trading today, the shares dipped to 293p before recovering to 300p.
With a market valuation of around £30bn for the owner of brands including Sensodyne toothpaste and Panadol painkillers, analysts said GSK would face questions over why the company refused Unilever’s £50 billion bid for Haleon earlier this year.
“It will be for Haleon’s management to justify why they rejected the approach,” said Chris Beckett, head of equity research at Quilter Cheviot.
Haleon’s demerger, headed by former Novartis executive Brian McNamara and chaired by former Tesco chief executive, Dave Lewis, has been accompanied by forecasts of annual like-for-like sales growth of between 4% and 6%. 
However, most analysts are predicting growth towards the lower end of the range.
“Investors must be reminded that this is not a complete free float. Instead, just over half of the shares are on offer to buy just now,” Mr Beckett commented.
“This will impact the share price going forward and depending on when GSK and Pfizer [majority shareholders, see below] decide to cash in. Fundamentally, this is an attractive industry and business to have exposure to, given its defensive characteristics, at a time where volatility is upsetting markets.”
Update 18 July 2022: Today, on their first day of trading, Haleon shares got off to a mixed start. Trading began at 330p, valuing the company at around £31 billion. But the shares slipped to 326p within the first half-hour of the UK market being open, only to regain some impetus subsequently rising to 337p.
Chris Beckett, head of equity research at Quilter Cheviot, said: “Haleon’s opening day trading is certainly at the lower end of where expectations were coalescing. However, this is not necessarily a bad thing. The fact it is a little lower than expected means there is scope for investors to build a meaningful position and potentially capture some upside.
“Fundamentally, this is an attractive industry – and business to have exposure to – given its defensive characteristics at a time where volatility is upsetting markets.”
Danni Hewson, financial analyst at broker AJ Bell said: “While Haleon owns some well-known brands including Sensodyne and Advil, that may not be enough to entice a line of buyers for the stock.
“Shoppers are increasingly going for supermarket own-label products as the cost of living crisis hits, with plenty of cheaper options for toothpaste and headache tablets than those sold by Haleon. That raises the risk of Haleon struggling to deliver meaningful earnings growth in the near-term, which is hardly the best start to life as a standalone business.”
Shareholders in GlaxoSmithKline (GSK), the UK’s FTSE 100 pharmaceutical giant, have an important decision to make next week.
Between roughly a quarter and a third of the value of their investment will be handed back to them in the form of shares in Haleon, GSK’s newly-created consumer healthcare unit.
Investors will then be faced with three choices: retain their shares in Haleon, sell them and re-invest in GSK itself, or sell the shares and invest somewhere else entirely.
On Monday 18 July 2022, the London stock market will witness the long-awaited break-up – a ‘demerger’ in City jargon – of GSK, one of the UK’s largest and oldest public companies.
At the same time, the move will be accompanied by the London listing of Haleon, the world’s largest consumer healthcare business, spun out of GSK in a joint venture with Pfizer, the US drugs group. From that day, shares in Haleon will start trading on the stock exchange.
When a demerger takes place, investors still own the same assets as before, but effectively hold some through a parent company – in this case GSK – and the rest through new shares in a spin-off business – in this case Haleon.
With an anticipated valuation of between £40 billion to £45 billion, Haleon will immediately take its place as a top 20 ‘Footsie’ company and will become Europe’s largest company listing for over a decade.
The last stock market listing on a similar scale was mining and commodity company Glencore’s entry at a £38 billion market valuation in 2011.
Earlier this year, GSK slapped down a £50 billion bid for the business by consumer goods giant Unilever saying that it undervalued Haleon’s prospects.
The demerger was set in train about three-and-a-half years ago when GSK’s chief executive, Dame Emma Walmsley, surprised the City of London with news of the break-up plans.
GSK’s thinking behind the move was that both companies – GSK itself and Haleon – would be able to work more successfully as separate entities.
The separation was formally approved by shareholders earlier this July. The demerger will provide GSK with the opportunity to reset its balance sheet with the aim of unlocking investment in its vaccines and biopharmaceuticals business to boost research after years of weak productivity.
Haleon, meanwhile, will be responsible for a world-leading portfolio of leading consumer health brands including Panadol painkillers and Sensodyne toothpaste.
Analysts say the product focus and investment requirements of the two businesses will be significantly different. For example, GSK says it spends around 15% of sales on research and development while the figure at Haleon will amount to about 3%.
The demerger plans were not met with universal approval. For example, Elliott Advisors, the activist US hedge fund which took a stake in GSK in April last year, publicly encouraged the company to pursue opportunities for a potential sale of the consumer business.
Eligible GSK shareholders will be given one share in Haleon for each share owned in GSK.
Ordinary shares in Haleon will be listed on the premium segment of the London Stock Exchange. Given the new company’s immediate valuation, it should join the FTSE 100 soon after that.
Once the demerger is completed, GSK will undertake a share consolidation in order to “maintain consistent pricing”, according to index compiler FTSE Russell.
Following the demerger, just over half (54.5%) of Haleon shares will be held by GSK shareholders, about a third (32%) by Pfizer and the balance by GSK itself.
It was previously thought that Pfizer would hold on to its stake after the spin-off, but the company has announced that it will be selling out of its holding in a “disciplined manner”.
In recent years, GSK has been a staple stock in the portfolio of income investors. However, GSK cut its dividend as part of the demerger, paying out 14p a share for the second quarter of 2022, compared with 19p for the same period last year. 
The GSK board has forecast a dividend of 27p per share for the remainder of 2022, rising to 45p per share next year.
Haleon has not announced a dividend policy, but initial indications suggest it will distribute between 30% and 50% of earnings.
On the face of it, dividing up a business to provide the new components with more autonomy and focus makes sense. In practice, however, gains can be harder to realise.
The competition may react aggressively, or the market may not be as enthusiastic about the new arrangement as the management board that proposed it. The demerged business may end up being taken over which, while boosting short-term value, makes it more difficult to assess the merits of the split.

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Associate Editor at Forbes Advisor UK, Andrew Michael is a multiple award-winning financial journalist and editor with a special interest in investment and the stock market. His work has appeared in numerous titles including the Financial Times, The Times, the Mail on Sunday and Shares magazine. Find him on Twitter @moneyandmedia.

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