Haleon’s lacklustre London debut: Flawed business or just bad timing?

Written by Kunal Sawhney, CEO, Kalkine

The consumer healthcare arm of pharma giant GSK Plc, Haleon, made its stock market debut on Monday, becoming the largest listing on the London Stock Exchange in over a decade. The debut also made Haleon the world’s largest independent consumer healthcare firm. However, the new company got a lacklustre start on the market amid concerns over soaring inflation and market turmoil.

Stocks of the Sensodyne toothpaste and Advil painkillers maker opened at GBX 330 on Monday, putting the company’s valuation at around £30 billion. During the day, it touched the high of GBX 337.40 but failed to maintain the gains and eventually closed 6.6% lower.

Demerger of the consumer goods business

GSK had received a £50 billion bid by Unilever before demerging the business, but it went ahead with its demerger plan and rebuffed the offer from Nestle, calling it ‘too low’. Notably, no new shares were issued, and existing GSK shareholders received one share of Haleon for every share of GSK they owned.

With all the hype about the demerger, a valuation of at least £30 billion was expected on a listing day. To match the £50 billion offer that Unilever had put for GSK’s consumer business, a valuation of £39.5 billion would have been required, taking the £10.5 billion of borrowing assumed by Haleon into account. But the company’s initial valuation could only touch £28.5 billion on the first day, more towards the bottom of the reckoned range.

Future of the stock

However, the initial valuation wouldn’t matter much for long-term investors. The stock prices of demerged entities take some time to settle because of the lack of normal liquidity. Investors also find it hard to be able to draw conclusions without several days of trading.

Additionally, with the new listing, GSK has passed on a significant chunk of its debt to the new businesses. This may turn out to be a good decision for the company, as Haleon’s revenues should be relatively stable in the long term in comparison to the now pharmaceuticals and vaccines-only business of GSK. Haleon will have to adapt to the current market scenario.

However, the company will have to prove that it can achieve its target of 4-6% annual growth while reducing debt in the medium term. While 4% is still achievable, considering the fact that the unit has been touching it for a few years, 6% may seem like a tough task right now, amid the global situation.

One thing that goes in Haleon’s favour is its big brand name. The company owns some of the world’s most popular brands in the consumer health segment, and this should help it hang onto customers. Earlier this year, GSK had embarked on two deals to switch drugs from prescription-only to an over-the-counter format. The switches are supposed to be launched in the next three to four years.

Has the timing impacted the debut?

The listing also comes at a time when the global economic outlook isn’t very bright. The war in Ukraine, higher interest rates, and the cost-of-living crisis have led to a weaker risk appetite among investors. The UK markets haven’t been strong in terms of performance this year. In particular, consumer and retail stocks have been hit hard due to the decades-high inflation levels.

Despite the initial challenges, the future does look brighter for Haleon as it is a cash-generative business. It’ll take some time to find out whether it’ll be more than just a defensive performer.