Stock prices react as Unilever (ULVR) pursues GSK business
10:04, 17 January 2022
Unilever on Monday reiterated its intention to continue its pursuit of the business after being turned down over the weekend by GSK.
However it has not yet increased its £50bn ($68.2bn) bid for GlaxoSmithKline’s (GSK) consumer health joint venture with Pfizer.
Unilever had proposed a £50bn acquisition, comprising £41.7bn in cash and £8.3bn in Unilever shares.
In a stockmarket statement, the company said: “Unilever’s future strategic direction lies in materially expanding its presence in health, beauty, and hygiene.
Higher rates of growth
“These categories offer higher rates of sustainable market growth, with significant opportunities to drive growth through investment and innovation, and by leveraging Unilever’s strong presence in emerging markets.”
It added: “GSK Consumer Healthcare would be a strong strategic fit; 45% of GSK Consumer Healthcare is in Oral Care and VMS (vitamins, minerals and supplements) – categories in which Unilever already has a presence and substantial capabilities.
“OTC (over the counter) would be an attractive adjacent category, with the ability to combine Unilever’s consumer and branding expertise with GSK Consumer Health’s technical OTC capabilities.”
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The update added: “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 the proposed acquisition would be an “attractive and synergistic combination for the shareholders of Unilever, which would also deliver value and certainty for the shareholders of GSK and Pfizer”.
However, as things stand, any acquisition looks some way off. On the one hand, GSK seems committed to a demerger rather than a sale, while on the other hand, it appears Unilever would have to markedly increase its bid to move things on.
The stockmarket has not been slow to react, though.
GSK’s stock price was up 4.55% in early morning trading to 1,715.63p – perhaps reflecting that a higher bid for the business might be on the cards.
It was a different story for Unilever, with the stock price down 6.86% to 3,666.50p. Investors may be concerned that Unilever might be forced to pay too much for the GSK-Pfizer consumer business.
Unilever undervalues GSK business
On Saturday, GlaxoSmithKline confirmed it had received three unsolicited, conditional and non-binding proposals from Unilever to acquire the GSK Consumer Healthcare joint venture business with Pfizer. GSK holds a majority stake of 68% and Pfizer holds 32%.
GSK rejected all three proposals made on the basis that they fundamentally undervalued the consumer healthcare business and its future prospects.
The GSK board also stressed, in direct contrast to today’s statement from Unilever, that the proposals were not in the best interests of GSK shareholders.
Rather than looking to sell, the GSK board said it remained focused on executing its proposed demerger of the consumer healthcare business, to “create a new independent global category-leading consumer company which, subject to approval from shareholders, is on track to be achieved in mid-2022”.
Former Tesco CEO David Lewis was hired by GSK to lead the spin-off and listing of the consumer healthcare business.
GSK said its consumer healthcare business had been transformed since 2014 through the successful integration of the Novartis and Pfizer consumer health businesses in 2015 and 2019 respectively.
The expanded business reported annual sales of £9.6bn in 2021.
In its stockmarket statement, GSK said its business was well-positioned to grow sustainably in the years to come.
“The fundamentals for the £150bn consumer healthcare sector are strong, reflecting an increased focus on health and wellness, significant demand from an ageing population and emerging middle class and sizeable unmet consumer needs,” it said.
GSK is spelling out its growth credentials which may persuade Unilever to up its bid. The question is, would this represent good value and is Unilever approaching (or indeed financing) the deal in the right way?
Reg Watson, an analyst with ING, says that based on 2022 forecasts, a transaction struck at £50bn and funded by the disclosed mix of cash and equity, would leave Unilever on a 2022 proforma net debt/EBITDA multiple of 4.3 times, even after allowing for synergies and the sale of Ekaterra (Unilever’s tea business).
“For this reason, the Bloomberg reports which cite unnamed sources as saying that Unilever is looking to increase its bid but dispose of some of the acquired assets seems credible – but we struggle to see how they can be sold at an attractive enough multiple to bring the net debt/EBITDA ratio down.”
How should Unilever finance the purchase?
Almost a year ago, ING published a report, New Year, New U, which outlined how Unilever could add value through a transformational acquisition of Reckitt Benckiser.
In that report, ING assumed that Reckitt Benckiser could be acquired for around £70bn but it required the divestment of Unilever’s food and refreshment business to finance the purchase.
“We still believe that the solution to Unilever’s transformation is the wholesale divestment of refreshment rather than the piecemeal approach adopted so far with the sale of spreads and more recently, Ekaterra tea”.
Watson argues that if Unilever’s refreshment business were sold it would raise around £46bn, which would allow the company to bid around £60bn for GSK’s Consumer Healthcare business.
He concludes: “Unilever’s approach to GSK comes at a time when the CEOs of both companies are under fire from shareholders and activist investors for lacklustre performance.
“If Unilever’s CEO decides to increase his bid for GSK’s Consumer Healthcare business without selling the refreshment business, he’ll be under fire for a whole lot more than just lacklustre performance.”