Why Unilever's Bid For Consumer Unit Of GSK Is Spooking Its Key Investors

Unilever recently bid for GSK Consumer Healthcare business for £50 billion, as it believes that the consumer healthcare business compliments its existing business.

The bid was the third one to be rejected by GSK. GSK Consumer Healthcare is owned by GSK and Pfizer, both of whom combined the businesses in 2019.

The business owns several popular brands across various categories such as Eno, Sensodyne, Crocin, Otrivin, Advil, Panadol, and several others, with many of these brands commanding the top spot in markets across the globe.

GSK owns 68 per cent of the business, whereas Pfizer owns the balance 32 per cent.

Is Unilever’s Management Desperate?

For Unilever, jump-starting its revenue growth is quite important. Its share price performance has been lacklustre over the last few years. Since January 2017, the stock has given returns of around 12 per cent, despite the broader market almost doubling in the same period.

The sales growth has struggled to grow beyond 4 per cent, even falling to below 2 per cent in financial year 2020. The management, led by Alan Jope, is under pressure to grow the business at a healthier pace.

Given the fact that Unilever is still quite intent upon acquiring the business despite three rejections, shows that it is quite intent upon acquiring the company.

According to the management, the best route ahead lies in expanding the Health, Beauty, and Hygiene sector — GSK’s Consumer unit fits the bill.

These categories offer higher rates of sustainable market growth, with significant opportunities to drive growth through investment and innovation, and by leveraging Unilever’s strong presence in emerging markets,” said a press release by Unilever.

The acquisition of new brands would be accompanied by the divestment of older brands, according to the press release.

Not only would the move release capital from slow-moving brands, but enable separation dis-synergies to be offset by acquisition synergies. The company would take up debt to finance the acquisition, where the debt for Unilever would reach to four times EBIDTA (Earnings Before Interest, Depreciation, Tax And Ammortisation), which is uncharacteristic for a company of its size and industry.

While the valuation of the business around £50 billion is near industry standards, it is probably the control premium that has been a bone of contention between the buyers and sellers.

GSK is under pressure from its own shareholders, led by Elliott Management, an activist hedge fund. Emma Walmsley, the Chief Executive Officer of GSK, has been under fire from shareholders for her lack of expertise in the pharmaceutical space.

As a result, the £50 billion bid was rejected, with the ask estimated at around £60-70 billion.

Unilever’s Shareholders Remain Unhappy

However, Unilever’s shareholders have been sceptical about the move to buy GSK’s Consumer unit. Unilever’s stock fell almost 8 per cent after it signalled that it would continue its pursuit of the consumer business, while GSK’s stock continued rising by around 5 per cent.

Shareholders are sceptical about the synergies and cost advantages promised by Unilever’s management, and the pricing of the offer. In terms of growth, GSK’s consumer unit has grown at around 3 per cent as well, which isn’t any higher than Unilever’s growth.

Unless there is substantial value addition from the deal, shareholders are likely to remain sceptical. Many feel that it is a desperate move by Jope, under whom revenue growth and share price growth have stagnated.

Yet, investors and analysts do not believe that the deal would add any real value, and would rather destroy shareholder value.

“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,” Jope said in an attempt to calm shareholders.

Previously Criticised for “ESG Obsession”

Terry Smith, a fund manager, had criticised Unilever for its excessive focus on “displaying sustainability credentials”, rather than growing the business.

Smith-owned Fundsmith, is the tenth-largest shareholder of Unilever.

“A company which feels it has to define the purpose of Hellman’s Mayonnaise has clearly lost the plot,” Smith said.

While Smith’s critique found support and criticism in equal measure, the debate between the focus on environmental, social, and governance (ESG) issues, rather than on business, remains hotly debated in business circles.

Shareholders like Smith feel that the management should spend time growing Unilever’s slowing business rather than focusing on the public image as sustainable companies.

Would HUL Be Impacted?

Away from global deal-making, Hindustan Unilever had already acquired some of GSK India’s consumer brands such as Horlicks, Maltova, and Boost.

Horlicks was acquired for Rs 3,045 crore from GSK. It received the distribution rights for brands such as Crocin, Sensodyne, Otravin, and Eno, while GSK would continue working on research, marketing, portfolio strategy, and demand generation for the brands.

HUL has already doubled the reach of the nutrition business in India after the acquisition. Whether the GSK-Unilever deal has a meaningful impact on HUL’s earnings, is yet to be seen.

However, Unilever believes that the deal could drive growth in key markets such as the United States, China, and India.

For Jope, a successful acquisition that boosts growth is the only way to pacify shareholders, but shareholders remain sceptical of the valuations being paid for a slowly growing mature business.

It remains to be seen whether the management truly has a better insight into the business, when compared to the markets.