Thanks, but no thanks. That was basically the response from GlaxoSmithKline (GSK 2.14%) to Unilever's (UL +1.06%) recent offer to buy its joint venture consumer health unit for $68 billion. In this Motley Fool Live video recorded on Jan. 19, Motley Fool contributors Keith Speights and Brian Orelli discuss whether they think GlaxoSmithKline should have accepted Unilever's offer.
Keith Speights: One of the big stories in recent days was that GlaxoSmithKline (GSK 2.14%) revealed that it turned down an offer of more than $68 billion from Unilever (UL +1.06%) to buy the combined consumer health unit of Glaxo and Pfizer (PFE +1.24%). GlaxoSmithKline still plans to spin off this consumer health business as a stand-alone entity.
Brian, what's your take on this decision to give a thumbs down to Unilever?
Brian Orelli: Yeah, $68 billion is a lot of money. You would think maybe that was a decent price. But looking at the numbers, I can understand why GlaxoSmithKline turned down the offer.
The consumer healthcare division generated 2.5 billion pounds in the third quarter. That's the conversion rate gets you to $3.4 billion in the quarter. Annualizing that over four quarters or a year, that's $13.6 billion per year. At a $68 billion offer, Unilever is only looking at it at a price to sales ratio of five. That's pretty low and then GlaxoSmithKline actually breaks out operating profit for its individual businesses.
The Consumer Health Care business generated 648 million pounds of profit. That's $881 million or annually, that's $3.5 billion. Then that gives you a price-to-earnings ratio, or what essentially be earnings of about 19 times. They're offering 19 times product profit.
I think that GlaxoSmithKline and Pfizer can probably get more by spinning off that division into a stand-alone company, which is what they are planning on doing. I think they made the right move at this point to not go with Unilever $68 billion offer.
Speights: I agree with you. When Pfizer and GlaxoSmithKline first started discussing all the prospects here, a spin-off seemed to be the right move and it still seems to be the right move.
Now, I say that. It's always possible that Unilever or someone else to come back with an offer that's to good to turn down. It could be that the dynamics change here in the spin-off isn't the best alternative for investors. But for right now, I think you're right. I think spin-off is the way for these companies to go.
Orelli: What do you think of combining it with Johnson & Johnson's (JNJ 1.37%) spin-off?
Speights: That would be a very interesting move. Boy, you would have the 800-pound gorilla of consumer health. I wonder if regulators would let them get away with something like that.
Orelli: That's what I was thinking too. Johnson & Johnson actually bought Pfizer's healthcare division once already before then they've ended up getting a new consumer healthcare division when they bought why then that's what they did. Then they combine that with GlaxoSmithKline. They have a joint venture there.
Speights: I think for shareholders of any of these companies, they would love that move. But I just don't see that clearing the regulatory hurdles.
Orelli: Probably not.
