Shares in consumer-products giant Unilever fell by more than 7% today to their lowest level in around five years, after its £50bn takeover bid for GSK’s consumer health unit was rejected.
Both GSK and Pfizer, which holds a 32% stake in the division, believe the unit is worth at least £60bn.
Shares in GSK, which has been planning to sell the division for more than a year, rose 4% on the news.
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Unilever meanwhile tried to reassure its shareholders that the company won’t be dragged into a bidding war for the unit. “Please be assured Unilever will not overpay for any asset, particularly in the context where GSK consumer health is a very attractive option in the consumer health space. But it’s not the only option,” Unilever’s chief executive Alan Jope said.
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GSK’s current plan is to spin the consumer unit out as a separate listed company later this year, in order to focus on its vaccines and pharma business.
Laura Hoy at Hargreaves Lansdown notes that one reason why GSK/Pfizer may have rejected the latest bid is because rising inflation puts companies with strong brands (and therefore pricing power) in a good position “if consumers start to pare back spending.” GSK expects the unit’s organic sales to grow by 4%-6% per year.
But given the appeal of the unit, says Hoy, investors shouldn’t rule out another bid by Unilever. After all, GSK’s brands are highly appealing given Unilever’s increased focus on health, beauty and hygiene, and it has admitted that it is looking for acquisition opportunities in the sector. “With Unilever’s tea business expected to bring in upwards of £4bn when it’s sold later this year, management might have the firepower to sweeten the deal.”
If a deal was done, it would, says the FT, “be one of the largest ever on the London market”, outstripped only by the 1999 purchase of Germany group Mannesmann by Vodafone, and the 2016 purchase of SABMiller by AB InBev. That might cause problems in the longer run.
“Unilever already has relatively high leverage, and by paying largely in cash, you would have a highly levered new company that would have to focus for years on paying debt rather than driving growth,” Bruno Monteyne of brokerage Bernstein tells the FT.
Unilever has come under scrutiny recently after fund manager Terry Smith – founder and chief executive of Fundsmith, and Unilever’s ninth biggest shareholder – vented his frustration in his annual letter to fundholders, claiming the company is “obsessed with publicly displaying sustainability credentials at the expense of focusing on the fundamentals of the business”.
Activist hedge funds with stakes in GSK – which has long been one of the FTSE 100’s “dullest” stocks for its long-suffering shareholders – welcomed the bid. One such activist, Giuseppe Bivona of Bluebell Partners, told Bloomberg: “It’s a great asset and there should be broad interest in it.”
