Unilever has made a bid worth £50bn for the Consumer Health unit of GlaxoSmithKline (GSK). The offer was rejected by GSK as it “fundamentally undervalued” the business, although Unilever looks set to continue its pursuit after issuing a statement this morning justifying the approach and outlining its plans to expand its presence in the health, beauty and hygiene markets.
Unilever has so far made three offers to acquire the Consumer Healthcare business, which is a joint venture between GSK and Pfizer. It is already scheduled to be separated from the company’s pharmaceuticals and vaccines operation by way of a demerger later this year. The standalone firm would have a global product portfolio which generated sales of around £10bn in 2020. Its brands include Sensodyne, Voltaren, Panadol, and Centrum.
GSK revealed that the most recent proposal from Unilever on 20 December contained an offer of £41.7bn in cash and £8.3bn in Unilever shares. However, this was rejected on the basis that it undervalued the Consumer Healthcare business and its future prospects. GSK said its consumer goods division had the potential to increase sales by up to 6% a year in the medium term, and Unilever’s offers did not take that into account. It stressed that the proposals were not in the best interests of GSK shareholders.
An initial brief statement from Unilever said that GSK’s consumer arm “would be a strong strategic fit as Unilever continues to reshape its portfolio”. However, the plan has drawn scepticism from some City analysts and sent the group’s shares down 6% in early trading this morning.
Unilever subsequently brought forward a planned update to today that sets out the strategic direction that the company plans to pursue to reinvigorate its growth prospects after lacklustre performance in recent years.
Following last year’s unification of its UK and Netherlands entities into a single British company, Unilever said it had undertaken a review to reposition its portfolio into higher-growth categories. This concluded that the company’s future strategic direction lies in “materially expanding” its presence in the health, beauty, and hygiene markets.
Unilever stressed that any major acquisitions would be accompanied by the accelerated divestment of lower growth brands and businesses. “This would provide funding and enable separation dis-synergies to be offset by acquisition synergies,” it said.
The group noted that Consumer Health is a “highly complementary category”. It highlighted that 45% of GSK’s Healthcare business is in Oral Care and VMS – categories in which Unilever already has a significant presence. The company also said OTC would be an “attractive” adjacent category, with the ability to combine Unilever’s consumer and branding expertise with GSK’s technical OTC capabilities. “The acquisition would create scale and a growth platform for the combined portfolio in the US, China, and India, with further opportunities in other emerging markets,” Unilever said.
Whilst the GSK acquisition would help address its long-term strategic direction, Unilever stated that it was also focused on accelerating growth within the existing business. It said it plans to announce a “major initiative” to enhance its performance later this month, adding: “After a comprehensive review of our organisation structure, we intend to move away from our existing matrix to an operating model that will drive greater agility, improve category focus, and strengthen accountability.”
GSK’s share price rose 5% on the news of Unilever’s approach. Reports suggested that GSK and Pfizer, which holds a 32% stake in the Consumer Health unit, are holding out for an improved bid of at least £60bn.
Analysts were quick to voice reservations about the potential acquisition, as well as the debt with which it would saddle Unilever.
James Edwardes-Jones, an analyst at RBC Capital Markets, is quoted by the Financial Times as saying: “We see little justification for such a deal strategically, operationally or financially. Even seriously contemplating such a bid raises questions in our mind about management’s confidence in the current business.”
Bruno Monteyne, an analyst at Bernstein, said the transaction would entail “£10bn of shareholder value destruction”, whilst Martin Deboo, an analyst at Jefferies, said that “initial feedback on the deal from investors over the weekend has been almost uniformly negative”, reflecting low confidence in Unilever management and the potential of the deal to boost growth, together with concerns about debt levels.
A Unilever buyout would be one of the largest ever on the London market and one of the biggest globally since the start of the pandemic. Analysts at Barclays said the deal would be “very complex to execute in normal times, let alone in the middle of a global pandemic”.
Unilever stated this morning that after any acquisition “the company would target a return to current levels of gearing over the short to medium term”.
NAM Implications:
- Whilst analysts differ re viability of the deal…
- …rivals need to explore actionable implications.
- i.e. conduct ‘what-ifs’ re a go-ahead at between £55bn and £60bn.
- Bearing in mind the higher the price, the more the new owner will have to divest to restore current gearing levels in ‘the short and medium term’.
- Therefore anticipate an intensive analysis of profitability by brand, by country to determine Divestment/Hold…
- …and then a strong focus (high investment) in brands retained.
