Cloud over GlaxoSmithKline deal affects outlook; stock down by 8.3%

Final value of transaction hinges on whether distribution arrangement is part of deal

The GlaxoSmithKline Consumer Healthcare (Glaxo Consumer) stock was down 8.3 per cent after its parent announced a strategic review of the company’s Horlicks brand and other consumer nutrition products, including an assessment of its 72.45 per cent stake in the company.

The company, however, didn’t divulge further details of the review that would be completed by the end of 2018. But, the firm is planning to sell its consumer healthcare nutrition brands, including Horlicks, to fund the buyout of Novartis’ 36.5 per cent stake in the global consumer healthcare joint venture.

According to Kaustubh Pawaskar of Sharekhan, lack of clarity over the transaction would be an overhang for the stock in the near term and may result in de-rating of valuation multiples.

For shareholders, the deal’s structure will decide what they would get for their shares in the company. If there is a stake sale in Glaxo Consumer, which includes distribution arrangement for over-the-counter (OTC) brands such as Sensodyne, Crocin, Eno and Otrivin, it would entail an open offer. Another option is that if malted food drink (MFD) brands and other healthcare nutrition products, which generated global sales worth £550 million, or Rs 50 billion (most of which is from India), in 2017, is sold, and the distribution arrangement is spun off into a separate entity.

The company gets 24 per cent of its operating profit from distribution of the group’s products (distribution arrangement) and whether it is included or not will have a bearing on the deal value. 

Analysts peg the deal value in the range of Rs 200-250 billion, based on the current market capitalisation of GSK Consumer.

Despite weak sales of Horlicks, analysts at Kotak Institutional Equities said MFD remains a growth category in India, and there could be high interest in GSK Consumer’s MFD brands (Horlicks, Boost, Maltova, Viva) from competitors such as Mondelez (Bournvita), Kraft, other large food and beverage players or even private equity. Nestle (Milo) is likely to be an interested player, besides Unilever.

GSK Consumer has 56 per cent market share in the MFD category. While analysts at Kotak put a discounted cash flow-based fair value at Rs 6,500 a share, they expect the deal to happen at a premium to this. 

The stock is trading at Rs 6,095 at close on Wednesday.

An open offer and a change in control can turn the wheel of fortune for the company’s iconic brands.

Analysts at CLSA said the last few years had been challenging for GSK Consumer because of a tough macroeconomic environment. Also, there were company-specific issues like lack of aggression, delays in competitive responses and modest launches. Though revenues and margins, led by top management aggression and soft raw material prices, can see an uptick in the next couple of quarters, there is little comfort for investors, given the uncertainty over change in ownership.