Key points:
- GSK has completed the Haleon demerger
- The GSK price has natturally declined by the HLN value
- There's also a consolidation to come which will push GSK back up
GSK (LON: GSK), or GlaxoSmithKline, shares are down 18% this morning on the back of the Haleon (LON: HLN) demerger going live. This is fairly normal, everyone who owned GSK shares on Friday now owns GSK and HLN shares today, so the value of the GSK should have declined by the value of the Haleon shares they've also got. However, Glaxo has decided to complicate matters for us all by also undertaking a consolidation, it's just that they've not told us, as yet, what the consolidation terms are going to be. That makes valuation pretty difficult, although the aim is to make it easier over time.
The actual business activity here is that GSK has long been slightly odd. The mixture of a consumer healthcare business with a biopharma company just is a little odd. Consumer healthcare is a fast moving consumer goods (FMCG) business that depends upon marketing to that retail base for success. The creation of new products is about reading the market and supplying what it might want. Biopharma works entirely the other way around. What is it that research might possibly be able to create and, if that's done, shepherding it through the varied approvals processes (FDA, EMA and so on) to then be available to doctors and health care systems.
They're simply entirely different businesses with entirely different operating structures. Back in the past we used to like conglomerates because it cost so much to raise capital to do anything. So, internal generation from a mature product to spend upon research was sensible. Now, capital markets are cheap so probably better for each different business strand to be in an independent company. Thus those investors who want to be in biopharma can, those in FMCG are free to do so, each without having to invest in the other.
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So, the 18% fall in the GSK price is made up for by the fact that former holders now have Haleon shares worth 337p each as well. As it happens that's very close to the fall, in pence, of the GSK shares, at 323 p down. That is, the actual demerger is, in terms of the valuation of the overall holdings, roughly level. Which makes sense as all of this has long been known. GSK did not spring this on us on Friday night after all, this has been years in the making.
What does make matters more difficult in valuation terms going forward is that GSK is also going to undertake a consolidation. That is, some number of GSK shares will be pushed together to make some smaller number of GSK shares. This is, according to the company, to make comparisons between past and future about earnings per share, dividends and so on easier. In other words, remove this 18% fall in the GSK share price by reducing the number of GSK shares by – this is a guess but around right – by about 18%. The problem is that we don't know the terms of this consolidation because they're to calculate it today. After they've seen the effect of the demerger on the GSK price.
So, the nominal GSK share price is going to be highly volatile for the immediate future as the consolidation is worked out. Even as the real price hasn't fallen today – the value of those Haleon shares – and won't rise on the consolidation.