At first blush, it looks like just a little bit of an overreaction. Investor Terry Smith mocked socially-conscious Unilever for defining the “purpose” of Hellmann’s mayonnaise amid disappointing share price performance. A few days later, the UK-listed consumer products group confirmed that it had made a £50bn approach for a rival business belonging to GSK.
Unilever would probably have to go higher to win, shouldering heavy debts. Shareholders who feared the Anglo-Dutch company lacked ambition may now worry it has too much fire in its belly.
Unilever was, of course, plotting an approach for GSK’s consumer products division long before Smith’s comments became public. The pharmaceuticals group, under pressure from its own shareholders, has been planning to demerge the unit via a separate listing. Last month it appointed ex-Tesco boss Dave Lewis to chair the business.
The bidder, which owns brands such as Marmite and Domestos, has a good chance of derailing the demerger. Pfizer owns 32 per cent of GSK consumer products. The US drugs group has triumphed as a vaccine producer. It is hardly pinning its hopes on the GSK business that owns Aquafresh toothpaste. Activist investor Elliott would likely prefer cash to promises too.
The sticking point will be the amount Unilever and its own investors are willing to stump up. Its latest £50bn approach was around four-fifths in cash with the balance in shares. Lex values the consumer division at £43bn-£45bn, assuming a multiple of some 16 times forward ebitda typical in this sector.
The snag is that the £5-7bn control premium offered by Unilever on top of that looks slim. GSK — which published upgraded sales growth figures — is right to complain of undervaluation.
An uplift of at least 25 per cent is considered normal in the laggardly UK market. That would be £11bn at the top end, taking Unilever to a total price of £55bn for the GSK unit. Cost savings and other benefits might be conservatively worth about £8bn, taxed and capitalised.
The enlarged Unilever could cover up to £35bn of an increased price with medium-term debt. But that would double its leverage to some four times net debt to ebitda, steep for a FTSE-100 company. To get to £55bn it would need to take on additional short-term borrowing, repayable with proceeds from disposals. Unilever might also have to offer more equity.
Unilever chief executive Alan Jope would be betting big that he could squeeze higher profits from GSK’s consumer brands. This would depend on his success in taking them into developing markets, where his own company is better represented.
In contrast, wringing top dollar from Unilever would lift much of the weight from the shoulders of GSK boss Emma Walmsley. Critics have questioned her pharmaceutical expertise. There is no doubt she is a canny deal maker. She should seize this opportunity.
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