It’s a good job GlaxoSmithKline makes headache pills.
Investors in the pharmaceuticals giant have seen £9 billion wiped off the company’s value in the last two weeks, after experts suggested its diabetes drug, Avandia, might increase patients’ chances of having heart attacks. If it wants to relieve shareholders’ suffering, Glaxo shouldn’t just reach for the Panadol. It should sell off the extraneous bits of its consumer healthcare business, and hand investors the cash. Glaxo’s consumer division has three parts: non-prescription drugs, toothpaste and soft drinks. The latter two, which made up 7% of last year’s sales, don’t belong. There are few marketing or production synergies between vaccines, say, and Aquafresh toothpaste. The beverages unit has even less fit, despite its high margins. Its main brands, Ribena, Horlicks and Lucozade, were once associated with healthy lifestyles. Now they look more like obesity-fuel.
Now’s a good time to make the chop. Consumer goods companies trade at their highest premium to pharmaceuticals in five years, by Citigroup’s reckoning. Put the toothpaste and drinks business on the same 11 times 2008 earning before interest, taxes depreciation and amortization (ebitda) that Colgate-Palmolive trades on, and it could be worth £7 billion. Private equity buyers would be attracted to its high profitability. Pepsi and Coca-Cola, who see sports drinks as a growth area, might also see Lucozade as a way to get a quick boost in the UK.
Investors, meanwhile, aren’t putting any value on the non-drugs parts of Glaxo’s portfolio. The remaining pharma business, on a European sector multiple of nine times 2008 ebitda, is worth £83 billion. Take off £2.5 billlion in net debt, and the equity is worth just over £80 billion. That’s £5 billion more than Glaxo was worth at Wednesday’s close. Selling the drinks and toothpaste divisions now could be a neat way to unlock some value, and make the ongoing pain over Avandia a little more bearable.