GSK has heartburn which £50 billion could probably fix

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Investors are waking up to the risk of lawsuits against the makers of Zantac, once a blockbuster heartburn treatment. Suddenly, GSK Plc’s decision to spin off rather than sell its consumer health business, Haleon Plc, looks expensive.

Haleon, which is behind brands such as Sensodyne toothpaste and Panadol painkillers, was a joint venture between GSK, the majority owner, and Pfizer Inc. until it gained independence through the separation in July.

But GSK and Haleon have fallen this week amid growing concerns about civil claims. Zantac was withdrawn from sale in 2019 due to fears that it could cause cancer. Inevitably, lawsuits in the US have followed, with trials planned this year and into 2023.

If these were to be settled, the final bill could be between $7.5 billion and $10 billion, with about 30% attributable to GSK, Bloomberg Intelligence estimates. That compares with the $11 billion Bayer AG has shelled out to settle claims that its glyphosate herbicide causes cancer. Other analysts have much higher figures. Sanofi, Pfizer and privately held Boehringer Ingelheim are also exposed.

While Haleon says it is not a party to the Zantac litigation, there is a question mark over whether it could be liable for any costs borne by GSK or Pfizer. The prospectus for the spinoff said it had notified Haleon of potential indemnification claims.

Late on Thursday, GSK said the scientific evidence supported the conclusion that there is no increased cancer risk associated with the use of the treatment, adding that it would vigorously defend itself against claims to the contrary. Haleon said it was potentially only on the hook if GSK and Pfizer could not cover liabilities from third parties that had previously provided compensation.

Right now, investors can’t be sure of the final bill or where it will land. GSK’s market value has fallen by 11 billion pounds ($13 billion) this week and Haleon’s by 4 billion pounds.

Which brings us to the road not taken: GSK’s decision to reject Unilever Plc’s £50 billion bid for Haleon back in December. Even if you apply a pounding 50% bid premium to Haleon’s current market value, adding back the net debt only leaves you with £46bn. And Unilever was not the only suitor, private equity also snooped around last year.

The fight that followed tarred everyone involved. Unilever’s ambition leaked, and its shareholders retreat. What if GSK had not been so resilient and had quickly tied up a transaction at or just above par? Faced with a fixed price and with the logic and cost savings explained, Unilever’s shareholders might not have reacted so badly.

Unilever CEO Alan Jope is still rebuilding credibility after that episode. Now the embarrassment is shared with GSK CEO Emma Walmsley and her board. In last year’s M&A market, it’s hard to believe they couldn’t have done a mostly cash deal for Haleon that locked in a strong valuation. Even assuming that Unilever shareholders would have rejected any deal, that still leaves the question of alternative buyers — especially buyout funds, which don’t have to immediately justify their deals like listed companies do.

Of course, you can never see the future. But that’s why an essentially cash-based offer for an entire asset – which was dangled – is so attractive compared to the opportunity to spin it off to your own shareholders and retain a minority stake.

GSK may have thought it best to see the separation through because any rejected bidder would return once Haleon was cut loose. But events don’t always play out that way. Even without the Zantac woes, it would be hard to see Unilever coming back. Likewise, there is even less need for Reckitt Benckiser Group Plc – the obvious alternative suitor – to move in a hurry. GSK’s plan to use Haleon as a way to raise money by selling its remaining holdings also looks challenged.

If there is a battle between the merger arbitrageurs betting on a different approach to Haleon and the short sellers banking on further drift, the shorts will win.

More from Bloomberg Opinion:

• Waiting for the GSK Mega Deal hurts like a toothache: Felsted & Hughes

• Now what about Unilever? CEO Jope has options: Andrea Felsted

• Unilever to bid again despite Glaxo rejection: Chris Hughes

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he has worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.

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