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‘Alternative remedy’: GlaxoSmithKline’s messy split opens door to cleaner M&A cure

A logo sign outside a facility occupied by GlaxoSmithKline, in Rockville, Maryland on April 4, 2015. Photo credit: Kristoffer Tripplaar/ Sipa USA

Sometimes, simple treatments can be the most efficient. After admitting to considering selling its consumer drug unit, GlaxoSmithKline’s board may now be rethinking that idea. This would allow for a quicker exit and raise more money than Chief Executive Emma Walmsley’s plan of selling the unit to shareholders.

Elliott Advisors, an activist shareholder, would love to see the Sensodyne toothpaste business sold. It would be a huge win. Elliott Advisors has been calling Walmsley to reapply and questioning her plan of listing the consumer unit. The plan calls for the sale of most of the division to shareholders in the next year. However, GSK will retain a small percentage and will concentrate on pharmaceutical drugs.

Barclays estimates that the world’s largest consumer drug manufacturer has a market share of 5% worldwide. Despite its size, there would be plenty of bidders. If the division has a 16-fold increase in 2022 EBITDA, it is likely to be worth around 45 billion pounds. Due to its size, U.S. giants such as $340 billion Procter & Gamble and rival Johnson & Johnson could be in a prime position to purchase it.

A buyer could also reduce head office, sales, and manufacturing costs. This would justify a premium. If you assume that 10% of sales will be synergized, or 1,000,000 pounds, then add these to the expected operating profit for next year. The acquired business could make a net operating profit after taxes of almost 3 billion pounds, with a 17% tax rate. A bidder could still earn a near 6% return on capital invested if they paid 50 billion pounds. This is in line with the sector’s capital cost according to PwC.

Walmsley could also benefit from a sale. Walmsley’s consumer spinoff could take more than a year and tie up management energy. The unit’s shares could be affected by her plan to keep 20% of the stake, which may muddy GSK’s investment case. A sale would provide more cash to pay off the 21 billion pounds of debt and to invest in new drugs. This would help to revive GSK’s flagging pipeline. GSK has many ills that can be treated with a more straightforward deal.