With the first blush, it just seems like a bit of an overreaction. Investor Terry Smith teased socially-conscious Unilever for defining the “purpose” of Hellmann’s mayonnaise amid disappointing share price performance. A few days later, the UK-listed consumer product group confirmed that it had £ 50 billion approach for a competitive business belonging to GSK.
Unilever will likely have to go higher to win and bear heavy debt. Shareholders who feared that the Anglo-Dutch company did not have ambition may now be worried that he has too much fire in his stomach.
Unilever, of course, was planning an approach for GSK’s consumer products division long before Smith’s comments became public. The pharmaceutical group, under pressure from its own shareholders, planned to separate the unit through a separate listing. Last month, former Tesco boss Dave Lewis was named chairman of the company.
The bidder, who owns brands such as Marmite and Domestos, has a good chance of derailing the separation. Pfizer owns 32 percent of GSK consumer products. The American drug group has triumphed as a vaccine manufacturer. He is barely pinning his hopes on the GSK business that owns Aquafresh toothpaste. Activist investor Elliott is also likely to prefer cash over promises.
The bottleneck will be the amount that Unilever and its own investors are willing to put up. Its latest £ 50bn approach was about four-fifths in cash with the balance in equities. Lex values the consumer division at £ 43bn- £ 45bn, assuming a multiple of about 16 times ahead of ebitda typically in this sector.
The problem is that the £ 5-7 billion control premium offered by Unilever also looks slim. GSK – which has published upgraded sales growth figures – is complaining about undervaluation.
A lift of at least 25 per cent is considered normal in the lagging UK market. That would be around £ 11bn at the top, bringing Unilever to a total price of £ 55bn for the GSK unit. Cost savings and other benefits could conservatively be worth around £ 8 billion, taxed and capitalized.
The enlarged Unilever could cover up to £ 35 billion of an increased price with medium-term debt. But that would double its leverage to about four times net debt to ebitda, steep for an FTSE-100 company. To reach £ 55bn, it may be necessary to take out additional short-term loans, repayable with proceeds from sales. Unilever may also need to offer more shares.
Unilever CEO Alan Jope will make big bets that he can make bigger profits from GSK’s consumer brands. It will depend on his success in taking them to developing markets, where his own company is better represented.
In contrast, the twist of Unilever’s highest dollar will lift much of the weight off the shoulders of GSK boss Emma Walmsley. Critics have questioned her pharmaceutical expertise. There is no doubt that she is making a smart deal. She must seize this opportunity.
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