The big stock market story over the weekend has been the reported pursuit by consumer goods giant Unilever of London-listed peer GlaxoSmithKline’s (GSK) £50 billion toiletries and over-the-counter medicines business. Unilever, which in 2020 simplified its dual share structure by consolidating its Amsterdam and London listings into one, the latter, confirmed reports first published in the Sunday Times it made three unsolicited bids for the Glaxo unit late last year.
The last of the three, made on December 20, was for £41.7 billion in cash, topped up with £8.3 billion worth of Unilever shares. It was, however, rejected by GSK, and American pharma-giant Pfizer which owns a significant 32% minority stake in the unit) because the company felt the bid “fundamentally undervalued” the business and “its future prospects”.
Last year GSK told markets that it planned to spin out its consumer healthcare arm, which owns over-the-counter pharmaceutical brands like Panadol and Advil painkillers, Theraflu cold and cough relief and the Aquafresh and Sensodyne toothpaste brands. The pharmaceuticals giant added that it continues to pursue the original plan, telling investors:
“The board […] therefore remains 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.”
However, Unilever’s statement this weekend in response to the reports suggested it has not given up its pursuit of the GSK unit, indicating that further attempts to sway the current owner of the coveted portfolio of consumer healthcare brands are likely.
“Unilever notes recent reporting regarding its interest in GSK Consumer Healthcare and confirms that it has approached GSK and Pfizer about a potential acquisition of the business.
“GSK Consumer Healthcare is a leader in the attractive consumer health space and would be a strong strategic fit as Unilever continues to reshape its portfolio. There can be no certainty that any agreement will be reached.”
The comments make it clear Unilever does not see the rejection of its most recent bid for the business as the end of the road for a deal that, if concluded, would be one of the biggest in the history of the London Stock Exchange.
Why is Unilever interested in Glaxo’s consumer goods unit?
Unilever is a big company and with a market capitalisation of a little over £100 billion, it is currently the third most valuable on the London Stock Exchange. However, a £50 billion acquisition, mainly paid for in cash, would still be a huge deal for Unilever and highly risky if it didn’t pay off. So why are the consumer goods giants ready to roll the dice on such a mammoth merger?
The simple reality is that Unilever needs something relatively major to kickstart its share price performance after a period of underperformance that coincides with the reign of current chief executive Alan Jope, who took over from Paul Polman in 2019. The company has seen its value slide by around 4.5% since Jope succeeded Polman, with the FTSE 100 index up 6.7% over the same period.
Unilever was last week criticised by Terry Smith, founder of the Fundsmith funds house and manager of the highly successful Fundsmith Equity Fund. Smith was scathing about what he sees as Unilever’s loss of focus on business fundamentals as its management prioritise promoting its sustainability credentials. Lindsell Train’s Nick Train, another high profile fund manager, also described the company’s recent performance as “crushingly pedestrian”.
In short, Unilever needs growth and Glaxo believes its consumer health unit will deliver growth of 4% to 6% in the medium term, which would put it ahead of what its market’s average is expected to be. Unilever investors have also been pushing for a solution to the problem of its food business, which contains brands like Pot Noodle and Knorr, and has recently been a drag on growth.
Unilever would be expected to fund a large chunk of the approximately £50 billion in cash it is thought will be needed to get a bid for the GSK business over the line by divesting some of its current businesses. Fetching a reasonable price for the food business and using that to pay Glaxo could kill two birds with one stone.
The combined unit would bring together household brands like Unilever’s Dove soap and Domestos bleach with Aquafresh and Panadol. Industry commentators have reportedly described the combined portfolio of consumer goods brands as a “a perfect fit” for Unilever. One that “would move them up the scale in health and wellbeing, which is where they are playing.”
Why would the deal be so significant?
City analysts value Glaxo’s consumer goods business at somewhere between £42 billion and £48 billion. Glaxo believes Unilever should pay more of a premium for the savings and revenue generation synergies it believes the combined companies would represent. That range is also based on the unit’s recent growth of about 3% a year and Glaxo has stated it is convinced that should rise to between 4% and 6% a year in the medium term.
If Glaxo’s position on growth is possibly overly bullish or not is an open question but the unit’s growth will almost certainly outstrip what Unilever’s current stable of brands would be expected to achieve. And combining the businesses at a price tag of around £50 billion would be the London market’s third-largest deal ever, behind only Vodafone’s Mannesmann takeover and AB InBev acquiring SAB Miller.
With combined annual sales worth more than £50 billion the company that would result could be worth over £150 million. Consumer healthcare is also a stably growing market, supported by an ageing population in developed economies and a growing middle class in emerging markets. The global market for over-the-counter pharmaceuticals is forecast to be worth $280 billion by 2026.
Would the mammoth merger be good for investors?
Unilever, or at least Jope and a circle of supporters, obviously believes pulling off the acquisition will help the company return to growth. And prove a response to criticism that has been recently aimed at the company’s chief executive, board and upper management by major investors.
Unilever’s strength in emerging markets could potentially add additional growth to the Glaxo portfolio of brands. Around 70% of their sales are currently made in Europe and North America and Uniliver believes it can open up greater growth opportunities by taking the products into more emerging markets.
But there would also have to be question marks around whether the size of the deal would simply prove too big a bite for Unilever to currently chew. If a deal of such magnitude were to fail to drive the promised growth, it could prove catastrophic for shareholder value.
Growing too much too quickly can cripple a company’s growth just as easily as not growing quickly enough, or refreshing a portfolio of brands aggressively enough. Unilever has already been accused of both of the latter. Do investors have enough trust in the current leadership to have faith they’ll be able to smoothly combine two businesses into a huge but dynamically growing portfolio?
How likely is it to happen?
The noises being made by Jope and Unilever indicate they still have a level of confidence agreement on a deal can be reached with GSK. However, many market analysts believe they may be overconfident. And that while investors do want M&A activity from the company, and divestments, the scale the bid for the Glaxo business represents is not what many had in mind.
How investors react on Monday may prove a good indicator of how likely it is that Unilever shareholders will support such a huge move. There’s a feeling Jope may well lack the credibility to pull of such a big deal. And the market was not warmed up in the right way before news broke this weekend.
Unilever is also well known for the extent of due diligence and care it takes on acquisition. A source close to the company was quoted in the Sunday Times as commenting “they do serious due diligence on ten deals for every one they consummate, because it’s threading an eye of a needle.”
At this point in time, it looks a lot more likely that Jope won’t succeed in pulling off such a huge deal. He’s only going into his third year in charge but his future might already hinge on how the rest of any continued pursuit unfolds. Especially if it ultimately proves unsuccessful.