GSK Rejects 50 billion Bid from Unilever

Launching a bid that would create one of the biggest ever transactions involving London-listed businesses, Unilever has proposed multiple offers for the consumer health division of the pharmaceutical giant GlaxoSmithKline (GSK) in recent months. GSK stated that it had received several offers for the business from Unilever, with the latest being a 50 billion GBP offer on 20th December, comprised of 41.7 billion GBP in cash and 8.3 billion GBP in Unilever shares. However, GSK has indicated little interest in the sale of their business to Unilever and has rejected all three offers for the business, with the chief executive of the company, Emma Walmsley, stating that “After careful review of Unilever’s proposals, we decided that they fundamentally failed to recognise the value and the potential we see for Consumer Healthcare”. The company also stated that it intends to continue with its previously announced plan to break off its consumer healthcare business into an independent company through a demerger, ultimately listing on the stock market as a separate company. The new business will provide investors with a more attractive financial profile compared to other parts of the GSK business.

Unilever, a consumer goods giant which owns brands such as Ben & Jerry’s, Dove and Hellmann’s, would add consumer health brands such as Sensodyne and Aquafresh to its portfolio if it acquired the consumer goods division of GSK. Unilever also approached Pfizer for the transaction, as the American pharmaceutical firm already owns 34% of GSK’s consumer goods business. Those who know from within the two businesses say that Unilever has been attempting to kindle negotiations for the business for several months.

Attention has been drawn towards GSK’s consumer business since the conglomerate announced its intention to demerge the business in June 2021. In a letter to GSK, the activist hedge fund Elliot Management questioned whether the demerger was the method of disposal that was most beneficial for shareholders, urging the company to consider a sales process as well. Another activist firm, Bluebell Capital Partners, has also been pushing GSK for a sale of the business, with co-chief investment officer Marco Taricco saying Unilever’s offer is “proof that such a high-quality business has the potential to attract interest by strategic and financial buyers”. This demonstrates investors’ unease about the most beneficial method of disposal for the consumer business.

The price of 50 billion GBP for the business is aligned with the valuations of the business by analysts at both Barclays and Goldman Sachs. GSK has forecasted that its consumer goods division has the potential to increase sales revenue by up to 6% in the medium term, something which GSK states was not considered in Unilever’s offer. However, even though Unilever’s offer matches valuations from equity analysts, acquirers are expected to pay a premium over the value of the target business, often between 20-30% of the value of the target. Therefore, Unilever may indeed be undervaluing the consumer business of GSK. However, GSK was expected to leave approximately 10 billion GBP worth of debt on the books of the new consumer goods business after separation, which may lower the valuation offered by acquirers.

In a period of inflation, a business that produces consumer staples may be an attractive acquisition target for a CEO that is attempting to boost profits and margins in their business. This echoes the predicament for Unilever’s CEO Alan Jope, who has been under pressure as the business had recently missed targets for sales and profit margins. An acquisition such as this demonstrates Jope’s intentions to grow the business, and this would be the business’s first major acquisition under Jope’s leadership.

Unilever recently agreed to dispose of its tea business ekaterra for 4.5 billion EUR in a move to unload businesses that were weighing down the company’s growth. It has made acquisitions of smaller consumer brands in the past year, such as Onnit, a supplements company heavily promoted by popular podcaster Joe Rogan, and Liquid IV, a consumer-oriented hydration supplements business. This demonstrates Unilever’s appetite to widen its portfolio of already over 400 brands, with an increasing interest in the health and beauty space, which it hopes GSK’s consumer health branch will be a good fit for. However, despite the consumer-oriented nature of this GSK business, many of their brands are regulated health products, which Unilever has little experience with. This may raise questions about Unilever’s ability to manage and grow the business it would acquire from GSK.

GSK has so far held its ground under scrutiny from fierce investors such as Elliott, insisting that their current plan for separation is most beneficial for shareholders. However, the group might be willing to sell their consumer healthcare arm for an appropriate price. Therefore, for Jope to materialise his intentions to grow Unilever’s revenues, he will have to consider paying a higher price for the consumer goods business. As demonstrated by recent activity in the UK and Europe, private equity businesses are flush with capital and seeking acquisitions, meaning Unilever may have to act quickly before a bidding war ensues.

By Archie MacKechnie

Sector Head: Hortense Comon

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