© Reuters. PHOTOGRAPHY: Two bottles of Dove’s Deep Moisture Body Wash are on display in Toronto, Ontario, Canada, October 8, 2017. REUTERS / Chris Helgren / File Photo
By Siddharth Cavale
(Reuters) – Unilever (NYSE 🙂 is faced with a dilemma after its £ 50bn ($ 68bn) bid for GlaxoSmithKline’s NYSE 🙂 consumer healthcare assets was rejected – whether to raise bids and risk overpayments or demand another way to expand in healthcare?
The offer for GSK’s assets, including Sensodyne toothpaste and Advil painkillers, comes as Unilever faces steep inflation and slow growth in emerging markets, where it generates 60% of its revenue.
CEO Alan Jope, in that role since 2019, is also facing shareholder pressure due to the weak share price, which fell as much as 8 percent on Monday after his offer went public.
Analysts say digesting GSK’s health assets at a cost of over £ 50bn in cash and inventory would nearly triple Unilever’s leverage to 5.6 times in the first year from 2 times net debt to current EBITDA.
“The leverage implied by such a contract would make it less likely to turn its core business around,” said Bernstein analyst Bruno Monteyne, pointing to Unilever’s additional balance sheet pressure and limited ability to invest behind brands.
Unilever on Monday also announced plans to focus more on health, beauty and hygiene products, following an extensive review of its business.
That indicates the potential separation or postponement of the food business, at least three brokerage houses said. However, leaving a money-making business at the moment could be detrimental, they said, and it would be difficult for Unilever to sell the entire business to a single customer.
HSBC analysts said GSK’s move added uncertainty about where Unilever was headed.
“Unilever’s approach is likely to raise a number of questions about what it could do next from a merger and acquisition perspective and in terms of its own business structure,” HSBC analyst Jeremy Fialko said in a note.
Analysts have expressed concern about Unilever’s acquisition business so far, highlighting its $ 1 billion purchase of the Dollar Shave Club, which they said failed to significantly impact its wealth.
HSBC pointed to the company’s last major acquisition – Bestfoods for $ 25 billion in 2000 – which burdened it with slow growth, a middle ground among food brands, which Unilever cut back on tea sales and distribution companies.
“The unclassified historical record of large transactions in the sector – and indeed Unilever’s last really big acquisition, Bestfoods – is also likely to be at the forefront of investor minds,” HSBC said.
Bernstein’s Monteyne said big deals with consumer goods are not worth it because it is “impossible” to achieve very high growth rates in such large companies, pointing to Reckitt Beckiser’s deal with Mead Johnson and Danone’s acquisition of Whitewave foods.
IMPACT ON MARGIN
Analysts also said the agreement with GSK could significantly undermine Unilever’s stable operating margins of 18-19%, which is a great attraction for long-term investors, saying it offers only a medium-digit return on investment, given cost savings and synergies. income.
Berenberg analyst James Targett said he doubts the agreement will provide Unilever with the organic growth it seeks, pointing to GSK’s Consumer Health business’s average growth of 1% over the last 20 quarters, compared to 3% for Unilever.
While GSK’s consumer assets would boost Unilever’s presence in the oral care category and vitamins and supplements, it would also bring over-the-counter drugs, such as Panadol and Advil, to its list.
RBC Capital Markets said GSK’s large portfolio of products with clinical / medical characteristics and consequent regulatory barriers could limit Unilever’s ability to place acquired brands in new markets, as it does with consumer brands.
“We can’t imagine many things that would upset us more
about Unilever rather than gaining GSK consumer health, ”wrote James Targett of RBC.
“We see little justification for such an agreement strategically, operationally or financially.”
($ 1 = £ 0.7331)