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GSK’s Got Heartburn That £50 Billion Could Probably Fix

Zantac was pulled off the market in 2019 due to concerns it was carcinogenic.
Zantac was pulled off the market in 2019 due to concerns it was carcinogenic. (Photographer: Drew Angerer/Getty Images North America)

Investors are waking up to the risk of litigation against the makers of Zantac, once a blockbuster treatment for heartburn. All of a sudden, GSK Plc’s decision to spin off rather than sell its consumer-healthcare business, Haleon Plc, is looking costly.

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

But GSK and Haleon have plunged this week amid mounting concern relating to civil claims. Zantac was withdrawn from sale in 2019 amid fears it could be carcinogenic. Inevitably, lawsuits in the US have followed, with trials scheduled this year and into 2023.

Were these to be settled, the final bill could be between $7.5 billion and $10 billion, with about 30% attributable to GSK, estimates Bloomberg Intelligence. That compares to the $11 billion set aside by Bayer AG to settle claims that its glyphosate weed killer causes cancer. Other analysts have much higher numbers. Sanofi, Pfizer and privately owned Boehringer Ingelheim are also exposed.

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

Late Thursday, GSK said the scientific evidence supported the conclusion that there is no increased cancer risk associated with the use of the treatment, adding it would vigorously defend itself against contrary claims. Haleon said it was potentially on the hook only if GSK and Pfizer couldn’t cover liabilities from any third parties that had given prior indemnities.

Right now, investors cannot be certain of the final bill nor where it will land. GSK’s market value is down £11 billion ($13 billion) this week and Haleon’s £4 billion.

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 applying a thumping 50% bid premium to Haleon’s current market capitalization, you get to only £46 billion once adding back the net debt. And Unilever wasn’t the only suitor, private equity was sniffing around last year too.

The tussle that followed tarred everyone involved. Unilever’s ambition leaked and its shareholders recoiled. What if GSK hadn’t been so resistant and had quickly tied up a transaction at or just above figure mooted? Faced with a fixed price and with the logic and cost savings explained, Unilever shareholders might not have reacted as badly.

Unilever Chief Executive Officer 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 struck a largely cash deal for Haleon locking in a strong valuation. Even assuming Unilever shareholders would have nixed any deal, that still leaves the question of alternative buyers — especially buyout funds, who don’t have to immediately justify their deals like listed companies do.

Of course, you can never see the future. But that’s why a substantially cash-based offer for all of an asset — as was being dangled — is so attractive versus the option of spinning it off to your own shareholders and keeping a minority stake.

GSK may have thought it was best to see the separation through, because any spurned bidder would return once Haleon was cut loose. But events don’t always play out like that. Even absent the Zantac woes, it would be hard to see Unilever coming back. Likewise, there is even less of an imperative for Reckitt Benckiser Group Plc — the obvious alternative suitor — to move in a hurry. The GSK plan to use Haleon as a way of raising cash by selling its residual holdings also looks challenged.

If there’s a battle between the merger arbitrageurs betting on another approach for Haleon and the short sellers banking on further drift, the shorts are winning.

More From Bloomberg Opinion:

• Waiting for GSK Mega Deal Hurts Like Toothache: Felsted & Hughes

• What Now for Unilever? CEO Jope Has Options: Andrea Felsted

• Unilever Must Bid Again Despite Glaxo Rejection: Chris Hughes

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

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

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