The auction of the consumer healthcare brands by Pfizer, the US drugs company behind the Advil painkiller, has become something of a headache. Reckitt Benckiser and Glaxosmithkline were considered frontrunners for the business but have faced scepticism from investors amid concerns about the financial and strategic impact any deal would have.
Reckitt’s surprise decision, announced on Wednesday night, to end talks with Pfizer, citing its interest in only buying part of the business, has seemingly relieved shareholders, with the stock rallying 270p to £58.96 yesterday, the biggest riser on the FTSE 100.
Rakesh Kapoor, Reckitt’s chief executive, was confronting unease over an acquisition — said to be valued at between $15 billion and $20 billion — stretching the consumer goods group at a difficult time. There were worries Reckitt would overpay, how it would finance a deal and the potential impact on its debt level.
Bernstein, the research group, estimated that paying with debt would have left an over-leveraged balance sheet potentially of up to 6.5 times net debt to underlying earnings. An alternative was a dilutive equity raise or offloading its home hygiene brands, which include the likes of Cillit Bang.
A deal would also have come at a testing time for management, however. Reckitt is still digesting the $16.7 billion acquisition of Mead Johnson, the baby formula maker, and facing questions over its acquisition-fuelled growth strategy and its ability to drive organic growth.
It is also restructuring its business into two units, consumer healthcare and home hygiene. The Slough-based business has also been faced a difficult period including a costly cyberattack, a provision to cover a US investigation relating to Indivior, the drugs business it spun off, and a product safety scandal in South Korea.
Reckitt’s decision to walk away from Pfizer has therefore removed much uncertainty hanging over the shares but it has heightened scrutiny on management’s ability to deliver organic growth and to make a success of the Mead Johnson deal. Despite Reckitt’s share rally, some will be disappointed because it could now strengthen Glaxo, a rival.
For Britain’s biggest pharmaceutical company it presents the biggest challenge for Emma Walmsley since she became Glaxo’s chief executive almost a year ago. Since indicating her interest in Pfizer’s consumer healthcare business last autumn, the shares have weakened on concerns about the future of the dividend and its capacity to acquire the minority stake Novartis holds in their consumer healthcare joint venture, should it become an option. They fell again yesterday, down 23½p to £12.72½.
If Glaxo pushes ahead with the deal, Reckitt’s exit means it could potentially get a better price. Liberum estimates that paying $15 billion could “deliver 9 per cent earnings accretion”. The broker also reckons it could be done while retaining the current dividend and buying out Novartis.
Ms Walmsley would also need to convince shareholders it would not mean taking its eye off reviving its struggling pharmaceutical division. She has made that a priority, hiring some heavyweight executives and focusing on fewer, bigger potential blockbusters. She has gone some way to reassuring shareholders, saying at the full-year results last month that returns to shareholders were a priority over big M&A and that any deal would have a “very strict criteria and discipline around returns”.
Should Glaxo follow Reckitt and walk away or Pfizer decides not to sell, both would have gleaned important details about a competitor’s portfolio.
Advice Buy (both)
Why GSK: Diversified business with renewed focus on pharmaceutical division. Reckitt: Signs of recovering organic sales growth.
Halma
A week ago Halma was named company of the year at the PLC Awards, sponsored by PWC. The prize is given to the entity that can best show that “success is not just a short-term phenomenon”. For a group that began life in 1894 in Sri Lanka (then Ceylon) in the tea industry and was transformed into an industrial holding company in the 1950s, Halma can certainly claim to be a long-term player.
Now based in Amersham, Bucks, and with a global workforce of 5,800, it has other notable features too. A wide range of markets and resistance to recession. Its products, everything from fire detectors to water treatment systems and gadgetry used for eye examinations, tend to be non-discretionary. This means its sales are driven by long-term structural trends — tighter health, safety and environmental legislation, urbanisation and demographics — rather than cyclical swings in the economy.
It has been on the acquisition trail, having bought five companies since the beginning of its 2018 financial year last April, two in its medical division, one in environmental and analysis and two in infrastructure safety. Despite this, analysts at Investec estimated its year-end debt leverage would be well below one-times earnings before interest, taxes, depreciation and amortization. This demonstrates its conservative financing as well as its firepower for more acquisitions, providing it can continue to find appropriate targets.
In a trading update yesterday the company, which graduated from the FTSE 250 to the FTSE 100 index last November, said it anticipated its annual adjusted profit to be in line with market expectations, within a range of £208.3 million to £218.1 million. Last year it posted adjusted pretax profit of £194 million.
It added that its Asia-Pacific business had maintained a strong performance with good progress in the UK, US, mainland Europe and other regions. In the group’s process safety division, which includes all its products that keep people safe at work, full-year growth is expected to slow. This is mainly due to tough comparatives with the previous year, when performance in the unit was unusually strong.
Advice Buy
Why Well-placed in markets where safety, health and scarce resources drive demand
