GlaxoSmithKline and Pfizer are holding out for an improved bid of at least £60bn for their consumer healthcare joint venture, bolstered by shareholder opposition to Unilever’s £50bn offer.
GSK dismissed Unilever’s bid on Saturday as “fundamentally undervalued”, as it revealed improved forecasts for the business.
A 25 per cent premium to the estimated value of the business — which would push a bid above £60bn — would warrant serious consideration from the board, according to one person close to Pfizer. Another person familiar with the matter said it would be “hard to turn down”.
GSK had been planning to spin off the unit, in which it owns a 68 per cent stake, but has been under pressure to consider a sale, including from US hedge fund Elliott Management.
Marco Taricco, co-chief investment officer at Bluebell Capital Partners, another activist investor pushing for GSK to consider a sale, said: “Based on the limited information we have so far, £50bn sounds like a floor, but it should be improved, either by Unilever or by someone else.”
Richard Buxton at Jupiter Capital Management, a top-30 shareholder in GSK, said the company should proceed with a spin-off as the consumer health unit has a “great future as an independent company which can re-rate over time as the market understands it better”.
“The idea of letting the goons at Unilever run it is laughable . . . There is no price at which I would want to sell it to them,” he said.
The two sides are battling over the consumer company’s valuation and have different views on the premium already offered, according to people familiar with the situation.
GSK’s guidance of 4 to 6 per cent growth in the medium term is higher than many analysts’ estimates of about 3 to 4 per cent, which could prompt them to increase their valuations from the current range of about £37bn to £48bn.
Unilever’s approach could prompt other suitors to make an approach, said people briefed on the matter. Procter & Gamble has been considering adding more consumer healthcare assets to its portfolio of products, they said. But it has not yet made an offer and could ultimately decide to move for Johnson & Johnson’s consumer healthcare assets, which the US company decided to spin-off in November.
A competitive offer for the GSK/Pfizer business would be based on a multiple to earnings before interest, tax, depreciation and amortisation in the high teens, potential synergies of 14 to 15 per cent and a premium of at least 25 per cent, according to a person familiar with the owners’ thinking.
The consumer unit’s ebitda is forecast to hit £2.7bn in 2022, so the base valuation would be about £48.6bn to £51.3bn. Synergies on revenue of £9.6bn would add another £1.3bn to £1.4bn. The premium would be a minimum of £12bn, making a total acquisition price of £61.5bn.
But GSK’s board will also need to weigh other factors, including tax and timing. One former board member said one of the spin-off’s attractions was that it was meant to be tax free. A sale would likely mean both GSK and its shareholders were saddled with a tax bill, although there may be ways to mitigate this.
“I doubt GSK will want to be deflected from a demerger,” he said.
The spin-off was planned for mid-2022 but a sale of this scale would take longer. Regulators would review the transaction even though there is not obvious significant overlap between the two companies.
Unilever may struggle to mount a significantly higher bid, with concerns it could be left hobbled by debt. Bruno Monteyne, analyst at Bernstein, said: “Unilever already has relatively high leverage, and by paying largely in cash, you would have a highly levered new company that would have to focus for years on paying debt rather than driving growth.”
Jefferies analyst Martin Deboo warned that an all-cash deal for £55bn would bring debt to a “prohibitive” 5 times ebitda.