The fiasco with Unilever’s offers increases the pressure on managers to deliver plan B.

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As Christmas approached, Unilever CEO Alan Jope hoped to give investors something to celebrate: the company’s largest acquisition ever.

In early November, it made an initial offer to GlaxoSmithKline and Pfizer’s consumer health department, hoping to take over the business before being set aside in the public market. That failed to bring them to the discussion table and Jope made a move on December 20 that he was sure would tempt them: a third, mostly cash offer of £ 50 billion.

But even that was demolished, and pharmaceutical partners turned down his offer just before the new year. GSK and Pfizer had different interests – with Pfizer’s purely financial engagement – but they both agreed £ 50 billion was too low.

This week, after news of the talks surfaced, investors had fun the final blow at every opportunity to agree.

During talks with management, they expressed confusion, skepticism and open opposition, according to several shareholders. Unilever’s share price fell as much as 11 percent before the company, which people familiar with the situation said it was never ready to offer much more, announced it would do not make a new offer.

The reaction to the offer pushed the FTSE 100 consumer group into its biggest crisis since tackling Kraft Heinz’s hostile approach five years ago, calling into question Jope’s management and opening the debate on how Unilever, which employs nearly 150,000 people, can boost its sluggish performance.

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“Unilever certainly has to deal with the fact that five years later the share price is only at that level [Kraft Heinz] offer, ”he said Terry Smith, top-15 shareholder, in a letter investors on Thursday. “Then why should we trust this management and the management to preserve value for shareholders?”

Shouts of shareholders

Dissatisfaction was already building up with more than 90-year-old ice cream maker Magnum, Domestos bleach and Pot Noodle, whose sales performance lagged behind competitors despite Jope’s promises of a sharper focus on high-growth areas.

The purchase of GSK was aimed at accelerating sales growth by applying Unilever’s marketing and distribution machine to healthcare brands, including painkillers Advil, Vitamins Centrum, and over-the-counter medications such as Theraflu. But instead it provoked outrage.

Investors feared the scale of the potential deal, which could increase Unilever’s debt to 4.5 or five times earnings. But not everyone opposed his general direction, said Bruno Monteyne, an analyst at Bernstein.

Bert Flossbach, founder and CEO of Flossbach von Storch, a € 80 billion Cologne-based asset manager and one of Unilever’s 10 largest shareholders, said: “Jope is in a difficult position because Unilever has been a lame duck for a long time . But if there is nothing to buy at a reasonable price, then don’t buy anything. “

Jope tried to refresh Unilever’s strategy a year ago expanding its offer in cosmetics and supplements and attracting younger customers – but the market welcomed it without enthusiasm.

GSK’s offer further undermined confidence in the ability of the CEO and his chief financial officer, Graeme Pitkethly, to make changes. “They have shown their hand: they obviously do not trust the existing business, otherwise they would not have thought about it,” said the investor, who asked not to be named.

After taking the lead in early 2019, the Unilever veteran Jope first retained and then rejected the difficult goal of reaching the 20 percent profit margin by 2020 set by his predecessor Paul Polman following an offer from Kraft Heinz.

But constant pressure to increase profitability, according to some investors and analysts, has resulted in underinvestment in Unilever brands, which range from Knorr stock cubes to Dova soap and have a particularly strong presence in emerging markets such as India.

One person who closely follows Unilever said that some of its problems relate to the categories in which it operates. “Even Superman couldn’t spur growth in Knorr either Hellmann to keep pace with the growth of L’Oréal or Estée Lauder. ”

A potential Unilever contract for GlaxoSmithKline and Pfizer’s consumer health department could increase its debt to 4.5 or five times higher earnings © Leon Neal / Getty Images

Plan for growth

Most analysts agree that Unilever should reorient its portfolio more quickly to high-growth areas, such as plant-based foods and vitamins, mimicking rival Nestlé, but differ in terms of potential acquisitions and disposals.

One of the 15 largest shareholders said: “I don’t think they have mismanaged their business, but I wonder if they are too attached to Unilever which is a big corporate giant as it is today.

“If they… Reduce the portfolio by selling some jobs that have been growing, which could actually crystallize some value.”

Martin Deboo, an analyst at Jefferies, wants Unilever to further reduce its food and refreshment department, which has shrunk compared to a larger household and personal care business. The company agreed a 4.5 billion euros deal sell your unit of tea last year.

“The market thinks Unilever’s growth problem is rooted in a lack of investment. We think this can be attributed to a structurally challenging food business, where we would like to see a faster pace of disposal, ”he said.

Smith and others also criticized Unilever’s focus on its sustainability; Smith ridiculed the company last week for talking about it Hellmann’s “purpose.” mayonnaise.

A group of consumers intended to sell some of their food departments to fund the acquisition of GSK, which meant that Smith’s comments on mayonnaise “could not have come at a worse time in terms of supporting Alan or in ironic times, given what Alan was doing behind the scenes, ”said a person who closely follows Unilever.

Smith admitted that communication with shareholders has improved since Polman’s days. He noted that he was consulted on GSK’s offer, although trying to get the amount of return on capital expected from GSK’s business “was like a dentist extracting a back tooth”.

Dissatisfaction with ice cream maker Magnum grew even before the GSK fiasco because its sales performance lagged behind competitors © Altan Gocher / GocherImagery / Shutterstock

But an anonymous investor accused the company of “arrogance” in communicating with shareholders, for example, that it did not signal that it was considering large acquisitions. “There were cultural problems under the previous CEO and I don’t think anything has changed under Jope,” the investor said.

They warned that their stake in Unilever was “at a naughty pace” and could be sold in a few years, relying heavily on the company’s planned announcements that will accompany the February 10 annual results.

The prospects for M&A are fading

Unilever indicated this week that it will be open to other major consumer health contracts, which could include doing business with Johnson & Johnson consumers – scheduled for a spin-off over the next 18 months – or Sanofi, which is also scheduled to separate from its parent company.

Analysts also pointed to the possibility of an agreement between Unilever and Reckitt Benckiser, a manufacturer of Durex condoms and Strepsils cold medicines.

But analysts and rating agencies have downgraded the prospect of acquiring or merging on the GSK department rankings following poor results from other recent major consumer deals. Reckitt’s acquisition of £ 13bn baby formula maker Mead Johnson in 2017 resulted in a £ 8bn write-off. According to Smith, Unilever’s significant recent acquisition, the $ 1 billion purchase of the Dollar Shave Club in 2016, “rests in an unmarked grave”.

GSK continues its preparations to separate the consumer division, including courting investors with a foundation so that both he and Pfizer can smoothly sell their retained stakes.

The most obvious other potential bidder, Procter & Gamble, actually ruled out a statement this week that there are no plans for big M&As. Private equity buyers would likely struggle to outperform Unilever’s offering, as they would not benefit from any synergy.

For Jope and Unilever’s management, the alternative is to convince shareholders that management needs to be given time to turn things around. “The main question now is how much damage has been done to the credibility of the administration and management,” Monteyne said.

“The problem with Alan [Jope] is he such a decent guy and wants to help people. So investors are asking him tough questions and he is trying to help. . . But you have to be a steel bastard and tell people what they don’t want to hear, “said a Unilever escort.

Jope has promised to present a “big initiative to improve our performance” this month, consisting of a new organizational structure. Unilever said it will strive to grow in health, beauty and hygiene.

Some investors are optimistic. Hugh Yarrow, portfolio manager at shareholder Evenlode Investment, said in a letter to investors that it was a “reasonable decision” not to proceed further with the GSK deal.

“These events and subsequent talks with shareholders may ultimately prove to be a useful catalyst for progress in Unilever,” Yarrow wrote.

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