Siddharth Cavale

Unilever faces a quandary after the rejection of its offer for GlaxoSmithKline’s consumer health assets at 50 billion pound (or $68 billion) was made. Should Unilever raise the bidding and take on more risk or look elsewhere to expand healthcare?

GSK has offered to buy Sensodyne and Advil toothpastes from Unilever. Unilever’s problems in these markets are compounded by steep inflation and slow growth.

Alan Jope has been the chief executive since 2019 and is currently facing shareholder pressure due to its stock price slump, which dropped as high as 8.8% Monday following its public bid.

Analysts stated that Unilever’s leverage would be nearly tripled if GSK’s consumer healthcare assets were sold at over 50 billion Pounds cash or stock. The current 2x net debt ratio to EBITDA is currently 2.

Bruno Monteyne Bernstein Analyst, stated that the leverage offered by such an agreement would decrease their chances of turning around core business. He cited Unilever’s additional balance sheet pressure and inability to invest back behind brands.

FOOD TO GO

Unilever also revealed Monday plans to increase its focus on beauty, health and hygiene after a comprehensive review of its businesses.

Three brokerages indicated that this could indicate a spinoff or disposal for the Foods unit. But, they warned that the decision to let go of a cash-generating business might be costly and Unilever would have difficulty selling the business.

Analysts from HSBC stated that GSK’s move increased uncertainty about Unilever’s direction.

“Unilever’s approach is likely to raise a number of questions over what it might do next from both an M&A standpoint and in terms of the structure of its own business,” HSBC analyst Jeremy Fialko said in a note.

PREVIOUS EXPERIENCE

Analysts were concerned about Unilever’s record in acquisitions. They cited the purchase of Dollar Shave Club ($1 billion) by Unilever in 2016, which they claimed had not made a significant impact on Unilever’s fortunes.

HSBC cited Bestfoods, the last company acquisition, for $22.5 billion, in 2000. It was a slow-growing, mid-range food brand that HSBC had to endure. Unilever managed to reduce this problem through the sale of spreads and tea businesses.

HSBC stated that investors will be aware of the “patchy track record” of large sector transactions – as well as Unilever’s most recent acquisition, Bestfoods – which HSBC said was likely.

Bernstein’s Monteyne claimed that large consumer goods contracts don’t pay as high growth is impossible for these big businesses. He pointed to Reckitt-Beckiser’s Mead Johnson acquisition and Danone’s Whitewave Foods acquisition.

MARGIN IMPACT

Analysts believe that a GSK deal would significantly reduce Unilever’s stable operating margins at 18-19%. This is a huge draw for long-term investors as it provides only a low single-digit return on investment when you account for revenue synergies and cost savings.

James Targett from Berenberg, an analyst said he wasn’t confident that the deal will give Unilever the organic increase it seeks. This was based on GSK Consumer Health’s 11% annual growth in the past 20 quarters as compared to Unilever’s 3 percent.

UNCHARTED WATERS

GSK’s consumer assets could help Unilever increase its presence within the vitamins and supplements and oral care categories, but it also would bring in over-the counter drugs such as Advil or Panadol.

RBC Capital Markets indicated that GSK has a large product portfolio with medical/clinical properties and therefore regulatory barriers could hinder Unilever from rolling the brands acquired into new markets, as it did with its consumer brands.

We can’t think of many things that could make us feel more unnerved.

James Targett, RBC’s director of consumer health wrote that Unilever was more important than buying GSK Consumer Health.

We don’t see any reason to make such an agreement strategically, financially or operationally.

($1 = 0.7331 pounds)